Question

Suppose Ford Motor Company issues a five year bond with a face value of $5,000 that pays an annual coupon payment of $150.

What is the interest rate Ford is paying on the borrowed funds?
Suppose the market interest rate rises from 3% to 4% a year after Ford issues the bonds. Will the value of the bond increase or decrease?

Answer 1

The interest rate Ford is paying on the borrowed funds is 3%. If the market interest rate rises from 3% to 4% after a year, the value of the bond will decrease as the fixed coupon payments become less attractive compared to new bonds issued at the higher rate.

Step-by-step explanation:

When Ford Motor Company issues a five-year bond with a face value of $5,000 and an annual coupon payment of $150, we can calculate the interest rate by dividing the annual payment by the face value of the bond. This gives us:

Interest Rate = (Annual Coupon Payment / Face Value) x 100%

Interest Rate = ($150 / $5,000) x 100% = 3%

Therefore, the interest rate Ford is paying on the borrowed funds is 3%.

If the market interest rate rises from 3% to 4% a year after the bond is issued, the value of Ford's bonds will decrease. This happens because the bond's coupon payments are less attractive when new bonds with a higher interest rate are available, leading to a drop in price for Ford's existing bonds to equate the yield to the new market rates.

Answer 2

interest rate = 15%

value of the bond will decrease

Step-by-step explanation:

given data

face value = $5,000

time = 5 year

annual coupon payment = $150

solution

we get here interest rate on the borrowed funds that will be as

interest rate =
`(annual\ coupon)/(face\ value/time)` × 100

put here value we get

interest rate =
`(150)/((5000)/(5) )` × 100

interest rate = 15%

and

when bond issued at interest rate = 3 %

but market interest rate 4%

so seller will reduce price of bond less than the face value

because we will look for atleast 4% payout when bond matures

so value of the bond will decrease