ent, and a 40 per cent probability that long-term interest rates will be 4 per cent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value?
ent, and a 40 per cent probability that long-term interest rates will be 4 per cent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Mobistar intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at €12,500. One-year interest rates are 6 per cent. There is a 60 per cent probability that long-term interest rates one year from today will be 9 per cent, and a 40 per cent probability that long-term interest rates will be 4 per cent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value?
Kindly provide explanation with your formula and calculations
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