Chung Wah company has decided to borrow money by issuing perpetual bonds with a coupon rate...
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Chung Wah company has decided to borrow money by issuing perpetual bonds with a coupon rate of 8%, payable annually, and a par value of $1,000. The 1-year interest rate is 8%. Next year, there is a 45% probability that interest rates will increases to 10% and a 55% probability that they will fall to 6%. a. What will the market value of these bonds be if they are noncallable? (8 marks) 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. (8 marks) Chung Wah company has decided to borrow money by issuing perpetual bonds with a coupon rate of 8%, payable annually, and a par value of $1,000. The 1-year interest rate is 8%. Next year, there is a 45% probability that interest rates will increases to 10% and a 55% probability that they will fall to 6%. a. What will the market value of these bonds be if they are noncallable? (8 marks) 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. (8 marks)
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Answer rating: 100% (QA)
a To determine the market value of the perpetual bonds if they are noncallable we need to calculate ... View the full answer
Related Book For
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe
Posted Date:
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