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A Boba Drinks LLC. is considering to issue perpetual, callable bonds with a coupon rate of 5% paid annually, and a par value of $1,000.  The nominal interest rate on these bonds will be 8% for the next year.   Within a year, the nominal rate on the bonds will be either 12% with probability 0.7, or 9% with probability 0.3.  The bonds are callable at $1400.  If the bonds are called and the interest rate decreases, what is the price of the callable bond today?

A Boba Drinks LLC. is considering to issue perpetual, callable bonds with a coupon rate of 5% paid annually, and a par value of $1,000.  The nominal interest rate on these bonds will be 8% for the next year.   Within a year, the nominal rate on the bonds will be either 12% with probability 0.7, or 9% with probability 0.3.  The bonds are callable at $1400.  If the bonds are called and the interest rate decreases, what is the price of the callable bond today?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 15P
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A Boba Drinks LLC. is considering to issue perpetual, callable bonds with a coupon rate of 5% paid annually, and a par value of $1,000.  The nominal interest rate on these bonds will be 8% for the next year.  

Within a year, the nominal rate on the bonds will be either 12% with probability 0.7, or 9% with probability 0.3. 

The bonds are callable at $1400.  If the bonds are called and the interest rate decreases, what is the price of the callable bond today?

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