A firm wishes to issue a perpetual callable bond. The current interest rate is 8%. Next year, there is a 30% chance that the interest rate will be 5% and a 70% chance that the rate will be 13%. The bond is callable at $1,090, and it will be called if the interest rate drops to 5%. If the bond sells for par ($1,000) today, what is the coupon (in $)? Please show work, thanks!
A firm wishes to issue a perpetual callable bond. The current interest rate is 8%. Next year, there is a 30% chance that the interest rate will be 5% and a 70% chance that the rate will be 13%. The bond is callable at $1,090, and it will be called if the interest rate drops to 5%. If the bond sells for par ($1,000) today, what is the coupon (in $)? Please show work, thanks!
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A firm wishes to issue a perpetual callable
bond. The current interest rate is 8%. Next
year, there is a 30% chance that the interest
rate will be 5% and a 70% chance that the
rate will be 13%. The bond is callable at
$1,090, and it will be called if the interest rate
drops to 5%. If the bond sells for par ($1,000)
today, what is the coupon (in $)?
Please show work, thanks!
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