Final answer:
The yield-to-maturity to value FCA Motors' bond issue is 5.75%, constructed from the sum of the 15-year U.S. Government Treasury yield of 4.5% and FCA Motors' credit spread of 1.25%. For Ford Motor Company's bond question, the interest rate is 3% (calculated as $150/$5,000), and if market interest rates rise, the value of their bond would decrease.
Step-by-step explanation:
The appropriate yield-to-maturity or discount rate to value FCA Motors' bond issue would be the sum of the yield-to-maturity on 15-year U.S. Government Treasury Bonds and the spread that is associated with FCA Motors' credit rating. Given that the yield-to-maturity of 15-year U.S. Government Treasuries is 4.5% and FCA Motors, being rated BBB+, has a spread of 1.25% over these treasuries, we add the two figures to determine the yield-to-maturity for the corporate bonds. Therefore, the discount rate for FCA Motors' bond issue would be 5.75% (calculated as 4.5% + 1.25%).
Coupon payments, bond yield, and credit ratings are fundamental concepts in corporate finance, particularly when companies like Ford Motor Company issue bonds. The interest rate Ford is paying on its bond is calculated by dividing the annual coupon payment by the face value of the bond. If the market interest rate rises, the value of bonds already in circulation typically decreases because new bonds would be issued at the higher current interest rate, making the existing bonds with lower interest payments less attractive.