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A firm wishes to issue a perpetual callable bond....

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A firm wishes to issue a perpetual callable bond. The current interest rate is 6%. Next year, there is a 30% chance that the interest rate will be 4.5% and a 70% chance that the rate will be 8.0%. The bond is callable at $1,000 plus an additional coupon payment and it will be called if the interest rate drops to 4.5%. a) If the bond sells for par today, what is the coupon? b) What is the bond's value today if the coupon is set at $70?

 

Paper#10157 | Written in 18-Jul-2015

Price : $25
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