An extendable bond has the following features:

Principal .....$1,000

Coupon .....9.5% ($95 annually)

Maturity .....8 years but the issuer may extend the maturity for 5 years

a) If comparable yields are 12 percent, what will be the price of the bond if investors anticipate that it will be retired after eight years?

b) What impact will the expectation that the bond will be retired after 13 years have on its current price if comparable yields are 12 percent?

c) If comparable yields remain 12 percent, would you expect the firm to retire the bond after eight years?