New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $125 over par value. There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current market price $ 1,000.00

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
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**Bond Valuation Problem:**

New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $125 over par value. There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

**Current market price**: $1,000.00 

This exercise involves probability and interest rate impacts on bond pricing. It demonstrates how future interest rate expectations and call provisions affect a bond's market value.
Transcribed Image Text:**Bond Valuation Problem:** New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $125 over par value. There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) **Current market price**: $1,000.00 This exercise involves probability and interest rate impacts on bond pricing. It demonstrates how future interest rate expectations and call provisions affect a bond's market value.
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