Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to €600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000. The appropriate discount rate is 5%.
Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to €600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000. The appropriate discount rate is 5%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
None
Transcribed Image Text:Laidler AG wishes to issue perpetual bonds with a face value of €1,000, these will have a 5% coupon
rate. Coupons will be paid annually. Laidler will set a call premium at €100 over face value. For
simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an
equal chance that by the end of the year interest rates will do one of the following: 1) Fall to 3.57%. If
so, the bond price will increase to €1,400. 2) Increase to 8.33 %. If so, the bond price will fall to
€600. a) Show that if the bond is not callable, its expected value to an investor today is worth €1,000.
The appropriate discount rate is 5%.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education