A firm wishes to issue a perpetual callable bond. The current interest rate is 8%. Next year, there is a 30% chance that the interest rate will be 5% and a 70% chance that the rate will be 13%. The bond is callable at $1,090, and it will be called if the interest rate drops to 5%. If the bond sells for par ($1,000) today, what is the coupon (in $)? Please show work, thanks!
A firm wishes to issue a perpetual callable bond. The current interest rate is 8%. Next year, there is a 30% chance that the interest rate will be 5% and a 70% chance that the rate will be 13%. The bond is callable at $1,090, and it will be called if the interest rate drops to 5%. If the bond sells for par ($1,000) today, what is the coupon (in $)? Please show work, thanks!
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 4P
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