Final answer:
The market value of a corporate bond with a fixed interest rate will increase if the economy's interest rates decrease. For Ford's bond with a coupon rate of 3%, its value will decrease if the market interest rate rises to 4%. After a market rate increase, you would expect to pay less than the bond's face value.
Step-by-step explanation:
The market value of a corporate bond with a fixed interest rate will increase if interest rates in the overall economy decrease. This is because bonds offer fixed interest payments, and when newly issued bonds have lower rates due to the decrease in market interest rates, existing bonds with higher rates become more attractive to investors. This increased demand drives the price of the existing bonds up.
In the example of Ford Motor Company issuing a five-year bond with a face value of $5,000 that pays an annual coupon payment of $150, we can calculate the interest rate Ford is paying on the borrowed funds (the coupon rate) by dividing the annual payment by the face value: $150 / $5,000, resulting in 3%. If the market interest rate rises to 4%, the value of Ford's bond would decrease, as new bonds issued at the higher rate are more attractive, reducing the demand for Ford's existing bond with the lower rate.
If you were to purchase the bond after the increase in market interest rates, you would expect to pay less than $10,000 for the bond, given that its coupon rate is now lower than the market rate, making it less desirable unless discounted.