Final answer:
The interest on a note receivable is calculated using principal, interest rate, and time. Bond valuation considers the coupon rate and current market interest rates. A bond with a 6% coupon rate would be worth less if market rates rise to 9%.
Step-by-step explanation:
The question deals with the calculation of interest for a note receivable and then touches upon the valuation of a bond near its maturity when market interest rates have changed. When calculating interest on a note receivable, the formula is: Interest = Principal × Interest Rate × Time. For the $10,000 note at 6% for 60 days, the interest would be calculated on an annual basis unless otherwise specified. However, the bond valuation requires consideration of several factors, including the bond's coupon rate, the time remaining until maturity, and the current market interest rates.
A bond's price will usually decrease if the market interest rates rise above the bond's coupon rate because new bonds are likely to be issued at the higher current interest rate. Investors will not want to pay full price for a bond with a lower interest rate when they can buy new bonds at a higher rate. Therefore, if the local water company's bond was issued at a 6% interest rate and the market interest rate is now 9%, you would expect to pay less than the face value of $10,000 for the bond.
To calculate the price you would be willing to pay for the bond, you would need to discount the remaining cash flows (bond payments) at the current market interest rate of 9%. This includes any remaining coupon payments, as well as the principal repayment at the end of the bond's term. This calculation is referred to as the present value calculation.