Question

On July 1, 2000, CriCo takes out a 10%, $10,000 note payable that is due on July 1, 2001. No interest is accrued at year-end 2000.

If the error is not discovered until July 1, 2001 then _________

Answer 1

Given the rise in interest rates from 6% to 9%, the bond's price is expected to be less than $10,000. This is because the current yield is less attractive than the new market rate, leading to a discount on the bond's price. The exact amount you'd be willing to pay can be calculated by discounting the bond's future cash flows by the new interest rate.

Step-by-step explanation:

If a local water company issued a $10,000 ten-year bond at an interest rate of 6%, and you are considering buying this bond when there is one year remaining until maturity but the current market interest rates are now 9%, the value of the bond will be affected.

Given the change in market interest rates, you should expect to pay less than $10,000 for the bond. This decrease in price compensates for the lower yield that the bond provides compared to the current market rate.

To calculate what you would be willing to pay for this bond, you would discount the bond's future cash flows (the final year's interest payment and the repayment of the bond's principal at maturity) by the current market interest rate of 9%.

Without carrying out the actual calculation, you can infer that the present value of these cash flows would be less than $10,000 because the discount rate (9%) is higher than the bond's coupon rate (6%).