Final answer:
When investing in a corporate bond, you can typically expect to receive interest payments semi-annually, though the frequency can be different based on the bond terms. If market interest rates increase after a bond's issuance, the bond's price on the secondary market usually decreases. One would calculate the present value of future cash flows using the new market rate to determine what to pay for a bond near maturity.
Step-by-step explanation:
If you invest in a corporate bond, typically you can expect to receive interest payments semi-annually. However, the payment frequency can vary depending on the terms of the bond, and some bonds might pay interest quarterly, annually, or even monthly. It is important to read the bond's prospectus to understand the specific payment intervals.
Corporate bonds are a way for companies to raise capital. These bonds function as loans from investors to the company. In the case of the local water company that issued a $10,000 ten-year bond at an interest rate of 6%, investors would typically receive annual interest payments, which in this case would be $600 per year. If you were considering buying this bond one year before its maturity, when market interest rates have risen to 9%, in general, you would expect to pay less than the face value of $10,000 because the bond's fixed interest rate is now lower than the current market rate. This makes the bond less attractive compared to newer issues offering higher rates.
To calculate what you might be willing to pay for this bond, you would need to find the present value of the bond's cash flows (interest payments and principal repayment) discounted by the current market interest rate of 9%. Assume the bond has one more interest payment of $600 to make before it matures and will repay the principal of $10,000. The present value of these cash flows would dictate the maximum price you should be willing to pay for the bond.