Beta plc plans to issue 10 million of bonds with a face value of 1,000, a coupon
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Question:
Beta plc plans to issue £10 million of bonds with a face value of £1,000, a coupon rate of 6% and maturity of 10 years. The bonds make annual coupon payments. The current yield to maturity of these bonds is 5%. In one year, the yield to maturity on the bonds will be either 6%, 5% or 4%, each with equal probability. Assume investors are risk-neutral.
Required
i) If the bonds are callable one year from today at 110% of face value, what is the price of the bonds today?
ii) What is the value of the call provision?
iii) What are the benefits to Beta from including a call provision? What are the costs? How would your answers change for a put provision?
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
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