Final answer:
A US Treasury security identical to TMCC's would likely have a higher price due to the lower risk associated with government bonds. Bond prices are inversely related to interest rates: if rates go up, bond prices go down. Ford's bond price would reflect market rates and the company's credit risk.
Step-by-step explanation:
If the US Treasury offered an essentially identical security to the one that TMCC, a subsidiary of Toyota motor, had offered, the price set by the US Treasury would have likely been higher. This is because US Treasury securities are generally considered to be among the safest investments in the world, as they are backed by the full faith and credit of the U.S. government. Consequently, investors are willing to accept a lower rate of return for this reduced risk. Thus, they would pay more upfront for the Treasury security compared to one issued by a corporate entity like TMCC.
Risk is a crucial factor in determining the price of bonds. When interest rates rise, the price of existing bonds typically falls because new bonds are likely to be issued with higher coupon rates that provide a more attractive return. This relation is inversely proportional; as interest rates go up, bond prices go down, and vice versa. In a scenario given the change in interest rates, you would expect to pay less than $10,000 for the bond if the current interest rates are above the bond's coupon rate.
As exemplified in the case where bond interest rates rise to 12%, the bond seller will lower its price below its face value to compensate for the lower coupon rate. This is to make the yield of the bond competitive with the prevailing market interest rates.
Furthermore, when considering a Ford Motor Company bond with a face value of $5,000 and an annual coupon payment, the price of the bond will also reflect the current interest rates and the perceived risk of Ford Motor Company's ability to make the coupon payments and repay the bond at maturity.