Final answer:
A 10-year, $10,000 bond with a coupon rate of 5% guarantees the bondholder an annual coupon payment of $500. If interest rates rise after the bond's issuance, the bond's price on the market usually decreases; if rates fall, the bond's price usually increases.
Step-by-step explanation:
A 10-year, $10,000 bond with a coupon rate of 5% is a promise by the issuer of the bond to pay the bondholder a fixed interest rate of 5% of the bond's face value each year until the bond matures, which is in 10 years. This means the bondholder will receive $500 annually in coupon payments. When interest rates change, the price of existing bonds tends to move inversely to the change in rates. If interest rates rise, the value of the bond decreases; if interest rates fall, the value of the bond increases. Therefore, if you are considering purchasing a bond after interest rates have risen, you would expect to pay less than the bond's face value. Conversely, if the interest rates have fallen, you would expect to pay more than the face value.
For instance, if the local water company issued a $10,000 ten-year bond at an interest rate of 6%, but after 9 years the market interest rates have risen to 9%, you would expect to pay less than $10,000 for the bond because its fixed coupon payments are now less attractive compared to new bonds that are issued at the higher current rates. The opposite would be true if market interest rates had fallen below 6%.