Bond Refunding KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 12 percent and 30 years to maturity. The current market interest rates on these bonds is 11 percent.

In one year, the interest rate on the bonds will be either 14 percent or 7 percent with equal probability. Assume investors are risk-neutral.

a. If the bonds are noncallable, what is the price of the bonds today?

b. If the bonds are callable one year from today at $1,450, will their price be greater than or less than the price you computed in (a)? Why? LO.1