Problem $15-8$ Valuing Callable Bonds

Assets, Incorporated, plans to issue $$7$ million of bonds with a coupon rate of $7$ percent,

a par. value of $$1,000,$ semiannual coupons, and $30$ years to maturity. The current market

interest rate on these bonds is $6\mathrm{.}5$ percent. In one year, the interest rate on the bonds

will be either $9$ percent or $4$ percent with equal probability. Assume investors are risk$-$

neutral.

a$.$ If the bonds are noncallable, what is the price of the bonds today? $($Do not round

intermediate calculations and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

Price of the bonds

b$.$ If the bonds are callable one year from today at $$1,050,$ will their price be greater or

less than the price you computed in part $($a$)?$

Greater

Lesser