Incorporated, plans to issue $8 million of bonds with a coupon rate of 7.1 percent, a par value of $1,000, semiannual coupons, and 20 years to maturity. The current market interest rate on these bonds is 6.6 percent. In one year, the interest rate on the bonds will be either 9 percent or 4 percent with equal probability. Assume investors are risk-neutral.

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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.