Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to €600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000. The appropriate discount rate is 5%.
Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to €600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000. The appropriate discount rate is 5%.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 4P
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![Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon
rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For
simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an
equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If
so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to
€600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000.
The appropriate discount rate is 5%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8a553d70-daa4-4734-a1f9-448d05dfcbc8%2Fbbc35f78-36c5-4231-b06d-c03067f6872c%2Fo4n2vjb_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon
rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For
simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an
equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If
so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to
€600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000.
The appropriate discount rate is 5%.
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