You purchase a bond today for $900 that has a 5% coupon rate, paid semi-annually, and has 10 years to maturity. The face value of the bond is

$1,000. One year later you sell the bond for $1,020

a) Calculate the Holding Period Return (HPR) (in %) over the one year that you held the bond. (8)

b) Do you think interest rates increased or decreased over the one year period that you held the bond? Explain briefly. (5)