Final answer:
When interest rates rise, bond prices fall. The market price of the Madison Corporation bond would be $887.37, which is below its face value.
Step-by-step explanation:
When interest rates rise, existing bonds with lower interest rates will sell for less than their face value. In the case of the Madison Corporation bond, with a face value of $1000 and an annual interest rate of 7%, the present yield to maturity is 9%. This means that if an investor were to buy the bond at its current market price, they would earn a yield of 9%.
To calculate the price of the bond, we need to discount the future cash flows (interest payments and the face value) back to the present using the yield to maturity. By plugging in the numbers into the bond pricing formula, we can find that the price of the bond is approximately $887.37.
Therefore, if the present yield to maturity is 9%, the market price of the bond would be $887.37, which is below its face value of $1000.