Newfoundland Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8

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Newfoundland Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8 percent, payable annually. The one-year interest rate is 8 percent. Next year, there is a 35 percent probability that interest rates will increase to 9 percent, and there is a 65 percent probability that they will fall to 6 percent.

a. What will the market value of these bonds be if they are non-callable?

b. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates rise and that the call premium is equal to the annual coupon.

c. What will be the value of the call provision to the company?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
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Corporate Finance

ISBN: 978-0071339575

7th Canadian Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Gordon Ro

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