Georgia Industries wants to sell new two year notes with a 4.5% coupon.However, its investment bankers tell the company's board that investors are nervous about what actions the Federal Reserve Board might take over the next year and would demand a reset provision in the notes that allows the coupon payment to increase to the new one year rate if rates increase but stays the same if rates do not increase.Assume that the current one year spot rate is 4% and that it is expected that it could increase by 20% with a probability of 60%, or decrease by 20% with a 40% chance. What would be a reasonable price for such a bond today (on a $100 face value basis)? 

Answer rating: 100% (QA)

To calculate the reasonable price for the bond we can use the concept of expected value The expected ... View the full answer