Bay Nuclear Power Plant (BNP) is considering raising funds $120 million over a short period. In its last management meeting, the finance director, Mani Lau (Mani), suggested that BNP issues perpetual bonds with a face value of $1,000 each with a coupon rate of 8.1% paid annually. The current market interest rate is 8%. Mani estimates a 0.3 probability that next year's interest rate will increase to 10%, and a 0.7 probability that it will fall to 6%. 

 

(a) If NBP issue a perpetual bond based on Mani's suggestion, please evaluate the current market value of the perpetual bond given the probabilities of the interest rate change. (Show your calculations). (7 marks)

Answer rating: 100% (QA)

Perpetual Bond Valuation with Interest Rate Uncertainty To evaluate the current market value of the ... View the full answer