The simple and basic answer to the question, "What is the relationship between interest rates and bond prices?" is simple. The relationship is inverse. What this project will attempt to do is demonstrate why this is true, and what elements complicate the question.
             There are two yields related to any bond; the coupon rate and the yield to maturity. The coupon rate is stated rate of return on the face value of the bond. This is very simple. Multiply the face value of the bond by the coupon rate and the result is the amount of interest will pay the holder each year. A $1000 face value bond with a coupon rate of 5% will pay the holder $50 per year or $1,000 multiplied by 0.05.
             The problem arises in the real world. The bond in question is almost never going to trade at exactly 100 or a price of $1,000 for a bond with a face value of $1,000. If the bond has no call provision (an option for the issuer to repay the bond before the due date if it wishes) and sells at exactly face value, its yield will be exactly the coupon rate and most of the discussion in this project will be of no relevance. The current yield and the yield to maturity will be identical. When the bond sells at some price other than face value two types of yield result, current yield and yield to maturity.
             If the bond is selling at a premium to its face value or a discount, then a type of calculation called yield to maturity (YTM) comes into play, and YTM is the real rate of return on the investment. The problem here is the amount of the premium or discount compared to the face value. If the bond in question is purchased at a price of 90, or $900 for a bond with a face value of $1,000 then the yield obviously changes. It is necessary to adjust the return not only for the fact that the investment is only $900 while the coupon payment is still $50 or a current yield of 5.6%; but for the fact that at some future date the bond w
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