Please do your answers on an Excel spreadsheet, using one tab per question. The alternative is to use pen and paper and submit these as a PDF (but this is not ideal.)

1. Bond Valuation & Refunding

1. Britterby Ltd has an outstanding perpetual bond with a 7 percent coupon rate. The bonds make semi-annual coupon payments. There is a 50 percent chance that the interest rate in one year will be 9 percent, a 30 percent chance that the interest rate will be 5 percent and a 20 percent chance that the interest rate will be 3 percent. If the one-year interest rate is, at present, 6 percent:

Required:

1. What is the current price of the bond if there is no call provision?

( 8 marks)

2. What is the current price of the bond if it can be called in one year and the call premium is set at $120 over par value?

( 4 marks)