11. Valuing Callable Bonds Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 5.8 percent, payable annually, and a par value of $1,000. The one year interest rate is 5.8 percent. Next year, there is a 35 percent probability that interest rates will increase to 7 percent and a 65 percent probability that they will fall to 4 percent. a. What will the market value of these bonds be if they are noncallable? 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 fall and that the call premium is equal to the annual coupon. c. What will be the value of the call provision to the company? Font Alignment Number hoard B 1 D E F G H B A Input area Coupon rate One year interest rates Par value 5 80% 5.80% 1,000 $ Probability of rate in one year Rate in one year 35% 7% Probability of rate in one year Rate in one year 65% 4% Output area a Price in one year if interest rates are Price If interest rates are Price Price today b. Coupon payment Coupon rate c Noncallable bond value Value of call option 3 ES 27 Submission Details x actibility initiate 9 #11 dy 9. Valuing Callable Bonds New Business Ventures, Inc. has an outstanding perpetual bond with a 9 percent coupon rate that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $150 over par value. There is a 60 percent chance that the interest rate in one year will be Il percent and a 40 percent chance that the interest rate will be 7 percent. If the current interest rate is 9 percent, what is the current market price of the bond? Coupon rate Call premium Par value $ $ 9.00% 150 1,000 Probability of rate in one year Rate in one year 60% 11% Probability of rate in one year Rate in one year 7% Current interest rate 9% Output area Coupon payment Call price Price in one year If interest rates are Discounted price Price If interest rates are Discounted price Price Price today