2 If the bonds are callable one year from today at 115 per cent of face value, will their price be greater than or less than the price you computed in (1)? Why? (30 marks)

Stature Technologies plans to issue £100 million of bonds with a face value of £100,000, coupon rate of 4.125 per cent and 10 years to maturity. The current yield to maturity of these bonds is 4 per cent. In one year, the yield to maturity on the bonds will be either 6 per cent or 3.75 per cent with equal probability. Assume investors are risk-neutral.