Bandon Manufacturing intends to issue callable, perpetual bonds with annual couponpayments and a par value of $1,000. The bonds are callable at $1,255. One-year interestrates are 8 percent. There is a 60 percent probability that long-term interest rates oneyear from today will be 9 percent, and a 40 percent probability that they will be 7percent. Assume that if interest rates fall the bonds will be called. What coupon rateshould the bonds have in order to sell at par value? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)Coupon rate%

Step 1:In thisPar value = $1000One-year interest rates = 8%Callable value = $1,255 If interest rates…

Answered: Bandon Manufacturing intends to issue…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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