Final answer:
Ford's bond with a $5,000 face value and $150 coupon payment has an interest rate of 3%. If market interest rate rises, the value of the bond will decrease because new bonds can offer higher returns. The market value of a bond fluctuates with changes in market interest rates, with values inversely related to interest rate changes.
Step-by-step explanation:
The question pertains to the issuance of convertible bonds and the subsequent changes in bond value due to fluctuations in the market interest rate. When a company like Ford Motor Company issues a bond, they are borrowing money from investors and promising to pay back the principal, plus an interest, known as the coupon rate.
In the example given, Ford issued a bond with a face value of $5,000 and an annual coupon payment of $150. To determine the interest rate being paid, we simply divide the annual payment by the face value of the bond (150/5000 = 0.03 or 3%). This represents the cost of borrowing for Ford.
If the market interest rate rises from 3% to 4% after the bonds are issued, the value of the bond will decrease because new bonds could be issued that offer a higher return on investment due to the increased market rate.
Changes in market interest rates impact the value of existing bonds inversely. Specifically, if the market interest rate rises, the value of existing bonds falls; conversely, if the market interest rate falls, the value of existing bonds that were issued at higher rates increases.
Therefore, the market value of a bond will fluctuate over time based on changes in prevailing market interest rates because investors always seek the best possible return, and these changes affect a bond's attractiveness compared to new issues.