Final answer:
The most popular par value for a corporate bond is $1,000. The price of a bond inversely reacts to changes in interest rates, with prices dropping as interest rates rise, and vice versa. This is due to the need to balance the yield between existing bonds and newer issues with different interest rates.
Step-by-step explanation:
The most popular dollar value for the par value of a corporate bond is typically $1,000. This question pertains to the concepts of bond valuation and the influence of interest rate fluctuations on the price of existing bonds. When interest rates change, the market value of a bond inversely reacts to this change. For instance, if interest rates rise above the bond's coupon rate, the bond's value will decrease below its par value to become more attractive to potential buyers. This is because newer bonds would likely be issued at the higher current interest rates, making older, lower-yielding bonds less valuable unless they are discounted.
Using the given example of a local water company's bond, initially issued at an interest rate of 6%, you would expect to pay less than $10,000 for the bond if you were buying it one year before maturity when interest rates have risen to 9%. This is because, at a 9% interest rate, the bond's fixed interest payments are less attractive compared to new bonds that could be offering higher rates. Therefore, the bond's price would need to be discounted to provide an equivalent yield to maturity for investors considering the current higher rate environment.
Conversely, if interest rates fall below the bond's coupon rate, the bond's value will increase above its par value because its fixed interest payments are now comparatively more attractive.