Final answer:
Interest expense is calculated by multiplying the face amount by the stated interest rate and prorating for the period. Market interest rate increases typically lead to a decrease in existing bond prices. One would pay less than the face amount for a bond when market rates exceed the bond's coupon rate.
Step-by-step explanation:
The question involves calculating the interest expense of a bond issued at a stated interest rate and determining the cost of acquiring the bond under changing market conditions. For the company's 7%, 15-year bond with a face amount of $90 million, to find the interest expense on June 30, we'd take the annual interest (7% of $90 million) and prorate it for the half-year period since bonds typically pay semi-annually.
For example: $90 million x 7% = $6.3 million annual interest; $6.3 million divided by 2 = $3.15 million for six months. However, without knowing the effective interest rate, we cannot calculate the exact expense, as it can differ from the stated rate. For simplicity, assuming that the effective rate equals the stated rate, the closest answer is c) $4,500,000.
Regarding the local water company bond: When market interest rates rise, the price of existing bonds generally decreases so they yield a similar return to newly issued bonds at the current rates. Thus, for the $10,000 bond at 6% when the current rate is 9%, you would pay less than the face value. The exact amount would depend on the present value of future payments (coupon and principal) discounted at the new market rate of 9%.