Suppose a perpetual, annual coupon payable bond. Current interest rate is 9%. Next year, there is a 40% probability that interest rates will increase to 10%, and there is a 60% probability that interest rates will fall to 8%. The bond is callable if the price of the bond is at 15% high from the par. Assume that if interest rates fall the bond will be called. If the bond sells at par, what should be the coupon rate?

Suppose a perpetual, annual coupon payable bond. Current interest rate is 9%. Next year, there is a 40% probability that interest rates will increase to 10%, and there is a 60% probability that interest rates will fall to 8%. The bond is callable if the price of the bond is at 15% high from the par. Assume that if interest rates fall the bond will be called. If the bond sells at par, what should be the coupon rate?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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