Final answer:
The yield to maturity for Nealon's bonds is 12%, which takes into account interest payments and capital gains or losses. The bond will sell for less than its face value if market interest rates are higher than the coupon rate.
Step-by-step explanation:
The yield to maturity (YTM) for Nealon's bonds under current market conditions is calculated based on the expected payments and the current market price of the bond. When the investor receives the $1,000 face value along with $80 for the last year's interest payment, the total return or yield includes interest payments and any capital gains or losses. In this case, the calculation is done as ($1,080 - $964)/$964, resulting in a yield to maturity of 12%. This yield reflects the total expected returns on the bond if held to maturity, factoring in the current market conditions.
If interest rates rise, bonds previously issued at lower rates will sell for less than their face value; conversely, if interest rates fall, bonds with higher coupon rates compared to the market will sell for more than face value. Therefore, given a rise in interest rates, we would expect to pay less than the face value ($10,000) for such a bond.