Final answer:
Bonds quoted at 115 are sold at 115% of their par value. The bond price changes inversely with market interest rates: if market rates rise above a bond's coupon rate, the bond's value falls. Would not pay more than $964 for a bond yielding the same as a 12% alternative investment.
Step-by-step explanation:
If bonds for AT&T are quoted at 115, they can be purchased at 115% of their par value. To address the scenario detailed in the question, let's consider how the price of a bond is influenced by changes in market interest rates. When market interest rates are higher than the bond's coupon rate, the bond's price will typically fall below its par value (discount), and when market interest rates are lower, the bond's price will be above its par value (premium).
For instance, imagine a local water company issued a $10,000 ten-year bond with a 6% interest rate. If, one year before the bond's maturity, market interest rates rise to 9%, the bond's value would drop below $10,000 because new bonds are issuing a higher return. Conversely, if you know that investing $964 in an alternative investment at a 12% interest rate would return $1,080 after one year, then you would not be willing to pay more than $964 for a bond that also returns $1,080 in a year, assuming the bond's par value is $1,000, as the bond would need to be discounted to provide a yield comparable to the market rate.