Final answer:
When the credit risk of a bond increases, the present value decreases and the yield increases. Furthermore, if market interest rates rise, the value of existing bonds typically decreases. These expectations hold as investors seek higher compensation for increased risk and opportunity costs.
Step-by-step explanation:
If a ten-year bond with a $10,000 face value pays a 5.0% annual coupon, has 2 years left to maturity, and has a discount rate of 6.5%, and then the credit risk on the bond increased, ceteris paribus, the present value (i.e. the market price) would decrease, and the yield would increase. This is because the increase in default risk would require a higher yield to compensate investors for taking on additional risk, which results in the bond price dropping to offer a higher return to the buyer.
In general, if the market interest rate rises, the value of a bond would decrease because the fixed coupon payments become less attractive compared to new bonds issued at higher current rates. For example, if Ford Motor Company issues a bond with a face value of $5,000 and an annual coupon payment of $150, the interest rate it is paying on the borrowed funds is 3%. If the market interest rate rises to 4%, the value of Ford's bond would decrease as it becomes less attractive relative to new bonds with higher interest rates.