Question

Suppose Ford Motor Company issues a five year bond with a face value of $5,000 that pays an annual coupon payment of $150.

Answer 1

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 = $\frac{annual\ coupon}{face\ value/time}$  × 100

put here value we get

interest rate =  $\frac{150}{\frac{5000}{5} }$  × 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