XYZ Corporation plans to issue perpetual bonds (par value = $1,000) with a coupon rate of 8%
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Question:
XYZ Corporation plans to issue perpetual bonds (par value = $1,000) with a coupon rate of 8% paid annually. The current market interest rates on these bonds are 7%. In one year, the interest rate on the bonds will be either 10% or 4% with equal probability.
a. If the bonds are noncallable, what is the price of the bonds today?
b. If the bonds are callable one year from now at $1,100, what is the price of the bonds today?
c. What is the compensation for bearing the call risk of XYZ’s callable bonds?
Related Book For
Fundamentals of Investments Valuation and Management
ISBN: 978-0077283292
5th edition
Authors: Bradford D. Jordan, Thomas W. Miller
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