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Suppose Ford Motor Company issues a five year bond with a face value of $5,000 that pays an annual coupon payment of $150.
What is the interest rate Ford is paying on the borrowed funds?
Suppose the market interest rate rises from 3% to 4% a year after Ford issues the bonds. Will the value of the bond increase or decrease?

Respuesta :

Answer:

interest rate =  15%

value of the bond will decrease

Explanation:

given data

face value = $5,000

time = 5 year

annual coupon payment = $150

solution

we get here interest rate on the borrowed funds that will be as

interest rate = [tex]\frac{annual\ coupon}{face\ value/time}[/tex]  × 100

put here value we get

interest rate =  [tex]\frac{150}{\frac{5000}{5} }[/tex]  × 100

interest rate =  15%

and

when bond issued at interest rate =  3 %

but market interest rate 4%

so seller will reduce price of bond less than the face value

because we will look for atleast 4% payout when bond matures

so value of the bond will decrease

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