Corral Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8.5 percent, payable annually. The one-year interest rate is 8.5 percent. Next year, there is a 40 percent probability that interest rates will increase to 10 percent, and there is a 60 percent probability that they will fall to 6 percent. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. a) 8.12% b) 8.77% c) 8.59% d) 8.35%

Corral Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8.5 percent, payable annually. The one-year interest rate is 8.5 percent. Next year, there is a 40 percent probability that interest rates will increase to 10 percent, and there is a 60 percent probability that they will fall to 6 percent. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. a) 8.12% b) 8.77% c) 8.59% d) 8.35%

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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