Final answer:
The total amount of bonds issued is $10 million, with the issue costs being separate expenses. In the scenario of a bond purchase with interest rates rising from 6% to 9%, the bond would be bought for less than face value to align its yield with current market rates. Option 1)
Step-by-step explanation:
When a bond is issued at par, the amount of the bond corresponds to its face value. Therefore, if a city issues $10 million in bonds at par, irrespective of the issue costs, the total amount of bonds issued remains $10 million. The incurred issue costs of $300,000 are associated expenses and do not change the nominal value of the bonds issued. In this case, the correct answer to the total amount of bonds issued is option 1) $10M.
Delving into a different scenario, if a local water company issued a $10,000 ten-year bond at an interest rate of 6% and you are considering buying this bond one year before maturity while interest rates have risen to 9%, you would expect to pay less than $10,000 for the bond. This is because the bond's fixed interest payments are less attractive when compared to new bonds available at a 9% interest rate. Therefore, the bond's price would decrease to provide a yield comparable to the current interest rates.