Final answer:
The cash interest component for a bond issued at a premium remains constant, as it is based on the fixed coupon rate. For the given Ford Motor Company bond with a coupon payment of $150 and face value of $5,000, the interest rate is 3%. If the market interest rate rises from 3% to 4%, the value of the bond will decrease due to a higher discount rate applied to the fixed coupon payments.
Step-by-step explanation:
For a bond issued at par, the cash interest payment is computed using the coupon interest rate. When a bond is issued at a premium (above its par value), the cash interest component does not change; it remains constant. The premium affects the yield to maturity but does not alter the coupon payments, which are fixed.
a. To calculate the interest rate Ford is paying on the borrowed funds, you would divide the annual coupon payment by the face value of the bond. For Ford Motor Company's bond, divide $150 by $5,000 to get a rate of 3%.
b. If the market interest rate rises from 3% to 4%, the value of the bond will typically decrease. This happens because the fixed coupon payments are now being discounted at a higher market interest rate, leading to a lower present value. Thus, if a bondholder tries to sell the bond, they will find that its market value has declined.