Answer :
Final answer:
A.The listed prices of 98.2 and 74.6 for X-Co's 7% unsecured bonds represent $982 and $746, respectively.
B. The decreasing price suggests an increase in the market yield because bond prices and yields have an inverse relationship. Similarly, if Ford's interest increases from 3% to 4%, the existing bond's value would decrease to offer a competitive yield.
Explanation:
A) The prices of X-Co's 7% unsecured bonds, originally stated as 98.2 and 74.6, are actually percentages of the bond's face value, which is typically $1,000.
So, if we convert these percentages to dollar amounts, 98.2 will become $982 and 74.6 will convert to $746.
B) If the price of a bond decreases, this indicates that the market yield (or interest rate) has gone up. This is because bond prices and yields move inversely to each other.
If the equivalent yield in the market is higher than X-Co’s coupon rate of 7%, then the bond’s price will fall below parity (100).
Using a similar scenario, if the interest rate Ford was paying on borrowed funds rose from 3% to 4%, the value of the bond would decrease because newer bonds in the market could offer higher returns for the same price (face value). So, the older bonds must decrease in price to provide a competitive yield. The yield or total return on a bond combines both the interest payments and capital gains.
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