Ford and GM Bonds Coupon Rate Analysis

What is the coupon rate of GM bond and Ford bond?

1) 6.6% and 5.4%
2) 5.4% and 6.6%
3) 6.6% and 6.6%
4) 5.4% and 5.4%
Final answer:

Answer:

Without specific details about interest payments or market pricing for the GM and Ford bonds, the coupon rate cannot be determined.

Explanation:

The coupon rate of GM and Ford bonds with 4 years to maturity, a $1,000 par value, a BB rating, and paying interest semiannually cannot be determined with the given information alone. To determine the coupon rates of the bonds, one would need additional specific information about the interest payments or the pricing of the bonds in the market. Generally, the coupon rate is calculated by dividing the annual coupon payment by the par value of the bond, and it is expressed as a percentage. Without these details, any answer would be speculative.

As for the scenario provided regarding the Ford Motor Company bond with a face value of $5,000 and an annual coupon payment of $150, the interest rate Ford is paying on the borrowed funds can be calculated as ($150/$5,000) × 100%, which equals 3%. If the market interest rate rises from 3% to 4%, the value of Ford's bond will generally decrease. This is because new bonds will be issued at the higher market rate, making the existing bonds with a lower coupon rate less attractive, thereby reducing their market price.