Final answer:
Martinez Corp.'s bond issue indicates that the market rate of interest is below 10% because it was sold at a premium. For the local water company's bond, if interest rates increase, the bond's value will decrease as newer bonds offer higher rates.
Step-by-step explanation:
When Martinez Corp. debited $1,090 for a $1,000 bond issue that has a 10% contract rate, this indicates that the bond was sold at a premium. The sale at a premium occurs because the market rate of interest is lower than the contract rate of 10%. Consequently, investors are willing to pay more for a bond that offers a higher return than the current market rate of interest.
In the example given in question 37 regarding a local water company's bond, if the market interest rates rise to 9% from the original 6%, the price of the bond will decrease. This is because new bonds in the market would be offering a higher interest rate, making the older bonds with a lower interest rate less attractive unless they are sold for less than their face value.