GoGo Inc. plans to issue a perpetual callable bond that pays 11.4% annual coupons. The current interest rate is 8%. Two years later, there is 15% probability that the interest rate will be 4.5%, 30% probability that the interest rate will be 10% and 55% probability that the interest rate will be 12%. The bond is callable at par value of 1,000 plus 3 additional coupon payments and it will be called if the bond price is greater than the call price.

1. Calculate the price of the callable bond.
2. What is the value of the call option?
3. What is the minimum coupon rate that the bond will be certainly called in two years?

Answer rating: 100% (QA)

To calculate the price of the callable bond we need to discount the expected future cash flows at th... View the full answer