Problem 3 Linz Styles Coupon Rate (RWJJ Ch. 20, Q5) Linz Stylers intends to issue perpetual callable bonds with annual coupon payments. The bonds are callable at $1,250. One-year interest rates are 11 percent. There is a 60 percent probability that long-term interest rates one year from today will be 13 percent, and a 40 percent probability that long-term interest rates will be 9 percent or even lower. Assume that if interest rates fall, the fall will be sufficient for the bonds to be called. What coupon rate should the bonds have in order to sell at par value?
Problem 3 Linz Styles Coupon Rate (RWJJ Ch. 20, Q5) Linz Stylers intends to issue perpetual callable bonds with annual coupon payments. The bonds are callable at $1,250. One-year interest rates are 11 percent. There is a 60 percent probability that long-term interest rates one year from today will be 13 percent, and a 40 percent probability that long-term interest rates will be 9 percent or even lower. Assume that if interest rates fall, the fall will be sufficient for the bonds to be called. What coupon rate should the bonds have in order to sell at par value?
Chapter5: The Cost Of Money (interest Rates)
Section: Chapter Questions
Problem 16PROB
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Problem 3 Linz Styles Coupon Rate (RWJJ Ch. 20, Q5)
Linz Stylers intends to issue perpetual callable bonds with annual coupon payments. The bonds are callable at $1,250. One-year interest rates are 11 percent. There is a 60 percent probability that long-term interest rates one year from today will be 13 percent, and a 40 percent probability that long-term interest rates will be 9 percent or even lower. Assume that if interest rates fall, the fall will be sufficient for the bonds to be called. What coupon rate should the bonds have in order to sell at par value?
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