Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,195.

One-year interest rates are 13 percent. There is a 60 percent probability that long-term interest rates one year from today will be 14 percent, and a 40 percent probability that they will be 12 percent.

Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value?

Answer rating: 100% (QA)

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