Final answer:
Given the rise in market interest rates to 9% from the bond's original 6%, you would expect to pay less than the $10,000 face value for the bond. The bond's price is affected by the inverse relationship between interest rates and bond prices, and its exact price can be calculated using present value considerations.
Step-by-step explanation:
When analyzing the scenario of a local water company that issued a $10,000 ten-year bond at an interest rate of 6%, and you are considering purchasing this bond one year before its maturity when market interest rates have risen to 9%, it's important to consider the impact of current market rates on the bond's price.
The Relationship Between Interest Rates and Bond Prices
Typically, there is an inverse relationship between interest rates and bond prices. When interest rates in the market rise, the price of existing bonds with lower interest rates tends to fall. This is because new bonds are likely issued at the higher current interest rates, making the old bonds less attractive unless they are available at a discounted price. Accordingly, you would expect to pay less than $10,000 for the bond in this situation.
Calculating the Bond's Current Price
The exact price you should be willing to pay for the bond can be determined through present value calculations, considering the single $10,000 payment to be received at maturity and the annual interest payment. Nonetheless, without making the exact calculation, it's clear that the price would have to be low enough to persuade a buyer to accept the lower 6% yield instead of the current 9% yield.