You are the CFO of Ford Motors Inc. The firm has decided to purchase new fixed assets that will allow them to more efficiently produce electric cars. To raise the funds needed to purchase these assets, you decide to issue bonds. You expect the new fixed assets to last about 20 years so youd like to issue bonds with a maturity of 20 years and a face value of $2,000. To set the coupon payment, you ask Moodys what the credit rating is for bonds of this maturity and risk. They tell you they will rate your bonds Aaa which have a 2% return per year, so you set the coupon at $40 per year.

a. What is the present value of the bond Ford is offering? Hint: Finding the price of a bond at the time when it is first issued shouldnt take you long. Ten years later, market interest rates on bonds of similar risk and maturity and decreased to 1%. Pretend an investor is looking for a Aaa rated bond with a maturity of ten years. They have two choices. They can buy a newly issued bond with a face value of $2,000, say from Toyota. The coupon rate on this newly issued bond would be equal to the current market rate of interest, 1%. This means they would get a coupon of $20 each year. The price of the Toyota bond would be $2,000. The investors other option is to buy the Ford bond since it also has a maturity of ten years since ten years have past. The coupon for the Ford bond is still $40 and the coupon rate for the Ford bond is still 4%.

b. In order to attract investors, would the price of the Ford bond have to be more or less than the price of the Toyota bond? In other words, does the Ford bond have to be sold at a premium (for more than $1,000) or at a discount (for less than $1,000)? Why?

c. Find the price of the Ford bond.