Final answer:
The price of the bond would be expected to be less than $10,000 due to the interest rate increase from 6% to 9%. To calculate the actual price one would be willing to pay, the present value of the bond's final year cash flows should be discounted at the current 9% interest rate.
Step-by-step explanation:
The student is asking about the pricing and valuation of bonds in the context of changes in interest rates. To address the student's question:(a) Expected Bond Price Given Interest Rate Change
Given that the market interest rates have risen from 6% to 9%, the price of the existing bond would generally be expected to fall below its original price, in this case, less than $10,000. This is because the fixed interest payments of the bond are now less attractive compared to new bonds that can be issued at the higher current rate of 9%.(b) Calculation of Bond Price
To calculate the price one would actually be willing to pay for the bond, one can use the present value formula to discount the future cash flows, which consist of the final year's interest payment plus the bond's par value at maturity. The cash flow in the last year for a $10,000 bond with a 6% interest rate is $600 (interest) plus $10,000 (par value), totaling $10,600. This amount should be discounted at the current market rate of 9% for one year to find the present value.