New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupor rate of 11 percent that can be called in one year. The bond makes annual coupor payments and has a par value of $1,000. The call premium is set at $125 over par value There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 1 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Current market price $ 166.67 X
New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupor rate of 11 percent that can be called in one year. The bond makes annual coupor payments and has a par value of $1,000. The call premium is set at $125 over par value There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 1 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Current market price $ 166.67 X
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:New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon
rate of 11 percent that can be called in one year. The bond makes annual coupon
payments and has a par value of $1,000. The call premium is set at $125 over par value.
There is a 60 percent chance that the interest rate in one year will be 13 percent, and a
40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11
percent, what is the current market price of the bond? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
> Answer is complete but not entirely correct.
Current market
price
$ 166.67 X
Expert Solution
Step 1: Define=price of bond
Price of a bond is the present value of the par value of the bond plus the present value of coupon payments of the bond.
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