QWE wishes to issue a perpetual callable bond (par value = $1,000) that pays 7.1% annual coupon. The current interest rate is 8.5%. Next year, the interest rate will be 3.6% or 8.9% with equal probability. The bond is callable at $1,064, and it will be called if the interest rate drops to 3.6%. What is the issue price of this callable bond?
QWE wishes to issue a perpetual callable bond (par value = $1,000) that pays 7.1% annual coupon. The current interest rate is 8.5%. Next year, the interest rate will be 3.6% or 8.9% with equal probability. The bond is callable at $1,064, and it will be called if the interest rate drops to 3.6%. What is the issue price of this callable bond?
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:QWE wishes to issue a perpetual callable bond (par value = $1,000) that pays 7.1% annual
coupon. The current interest rate is 8.5%. Next year, the interest rate will be 3.6% or 8.9% with
equal probability. The bond is callable at $1,064, and it will be called if the interest rate drops
to 3.6%. What is the issue price of this callable bond?
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