Infineon AG plans to issue €500 million of bonds with a face value of €100,000, coupon rate of 3.5 per cent and 10 years to maturity. The current market interest rate on these bonds is 6 per cent. In one year, the interest rate on the bonds will be either 8 per cent or 5 per cent with equal probability. Assume investors are risk-neutral. 

(a) If the bonds are non-callable, what is the price of the bonds today?

 (b) If the bonds are callable one year from today at €120,000, will their price be greater than or less than the price you computed in (a)? Why?

Answer rating: 100% (QA)

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