The return an investor earns on a bond over a period of time is known as the holding period return, defined as interest income plus or minus the change in the bond's price, all divided by the beginning bond price.
a. What is the holding period return on a bond with a par value of $1,000, and a coupon rate of 6 percent if its price at the beginning of the year was $1,050, and its price at the end was $940? Assume interest is paid annually.
b. Can you give two reasons the price of the bond might have fallen over the year?
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