Final answer:
When interest rates rise, existing bonds with lower interest rates become less attractive, causing their prices to decrease. You would expect to pay less than the face value for a bond with a lower interest rate than the prevailing market rate. The price you would be willing to pay can be calculated with the present value formula considering the current market interest rate.
Step-by-step explanation:
When considering the purchase of a bond, the current market interest rate is crucial to determining the price you’re willing to pay for a bond. In the scenario where a local water company issued a $10,000 ten-year bond with a 6% interest rate, and you are thinking of buying this bond one year before maturity when the market interest rate is now 9%, you would expect to pay less than the bond’s face value of $10,000. Given the change in interest rates -- with current rates being higher than the bond’s rate -- the bond’s price will decline to offer a competitive yield. To calculate the price you'd be willing to pay, you'd present value the remaining cash flows (the final year's interest payment and the principal repayment) using the current market interest rate of 9%. The formula for present value is Present Value = (Cash Flow / (1 + r)^n), where 'r' is the interest rate and 'n' is the number of periods until payment.
Likewise, when a company like Ford Motor Company issues a bond, the coupon payment and the face value of the bond are key details for investors. The $5,000 bond with annual coupon payments would also be subject to price changes in the market based on interest fluctuations.