# Bond price changes; holding period yield; bank discount rate

Suppose a 10-year bond is issued with an annual coupon rate of 8 percent when the market rate of interest is also 8 percent. If the market rate rises to 9 percent, what happens to the price of this bond? What happens to the bond's price if the market rate falls to 6 percent? Explain why.

An investor is interested in purchasing a new 20-year government bond carrying a 10 percent annual coupon rate with interest paid twice a year. The bond's current market price is $875 for a $1,000 par value instrument. If the investor buys the bond at the going price and holds to maturity, what will be his or her yield to maturity? Suppose the investor sells the bond at the end of 10 years for $950. What is the investor's holding-period yield?

Calculate the bank discount rate of return (DR) and the YTM-equivalent return for the following money market instruments:

A. Purchase price, $96; par value, $100; maturity, 90 days.

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