Final answer:
The price of a bond is influenced by changes in interest rates. If market interest rates rise above the bond's coupon rate, the bond's price will likely drop below its face value. Conversely, if market rates fall below the bond's coupon rate, the bond's price can rise above its face value.
Step-by-step explanation:
The subject question is related to the concepts of bond valuation and how interest rate changes affect bond prices. If interest rates change, the price one would expect to pay for a bond would differ from its face value.
Specifically, if the interest rates in the economy rise, the price of existing bonds will typically fall to compensate for the lower yield they offer compared to new bonds at the current higher rates.
Conversely, if interest rates decline, existing bonds with higher rates become more valuable, and their price will increase.
When considering the purchase of a bond, such as Hilton Inc.'s $1,000 bond convertible into 10 shares of common stock or Ford Motor Company's $5,000 bond with an annual coupon of $150, it's crucial to factor in the current interest rates compared to the bond's coupon rate.
If the market interest rates are higher than the bond's coupon rate, the bond will typically be sold at a discount (less than its face value). In contrast, if the market interest rates are lower than the coupon rate, the bond could be traded at a premium (more than its face value).