Final answer:
The price of bonds issued by Conner Enterprises will vary based on the market yield. A bond with a 10% coupon rate will be sold at a premium if the market yield is 8%, at par if the yield is 10%, and at a discount if the yield is 12%.
Step-by-step explanation:
The student's question is about the pricing of bonds issued by Conner Enterprises at different yield rates. When the yield rate matches the coupon rate, the bond is sold at face value. However, if the market interest rates are lower than the coupon rate, the bonds will sell for a premium; conversely, if market rates are higher, the bonds will sell at a discount.
For a bond with a 10% coupon rate and a market yield of 10%, the price would be at par, meaning the issue price would equal the face value, or $120,000. If the bonds were priced to yield 8%, the price would be higher than $120,000 because the bond's fixed interest payments are more attractive compared to the market rate. Conversely, if the bonds were priced to yield 12%, the issue price would be less than $120,000, as the coupon rate is no longer as attractive as the new market rate.
Using the example of the water company bond, if interest rates rise, the bond will be sold for less than its face value due to the lower interest rate compared to the market rate. Similarly, if we calculate the price for a bond at an interest rate of 9% using the formula given, we can determine the actual price someone would be willing to pay for it.