PKC Ltd is considering raising $120 million from the markets, In its recent management meeting, Winnie...

 

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PKC Ltd is considering raising $120 million from the markets, In its recent management meeting, Winnie Poon, the CFO, suggested PKC to issue perpetual bonds with a face value of $1,000 each and a coupon rate of 8.1% paid annually. The current market interest rate is 8%. Winnie 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) Calculate the current market value of the perpetual bond If PKC issues perpetual bond based on Winnie's suggestion . (Show your calculations). (7 marks) (b) The CEO, John Lung, decides to include a call provision in the bond contract such that the bonds are callable in one year. Calculate the coupon rate of the callable bonds such that the bonds will be sold at par. Assume the bonds will be called if the interest rates fall and the call premium is $150. (Show your calculations). (7 marks) PKC Ltd is considering raising $120 million from the markets, In its recent management meeting, Winnie Poon, the CFO, suggested PKC to issue perpetual bonds with a face value of $1,000 each and a coupon rate of 8.1% paid annually. The current market interest rate is 8%. Winnie 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) Calculate the current market value of the perpetual bond If PKC issues perpetual bond based on Winnie's suggestion . (Show your calculations). (7 marks) (b) The CEO, John Lung, decides to include a call provision in the bond contract such that the bonds are callable in one year. Calculate the coupon rate of the callable bonds such that the bonds will be sold at par. Assume the bonds will be called if the interest rates fall and the call premium is $150. (Show your calculations). (7 marks)

Answer rating: 100% (QA)

Answer a The annual coupon on a perpetual bond having a face value of 1000 and a coupon rate of 81 i... View the full answer