1. Suppose Kraus Intercable Company intends to issue perpetual bonds of $1,000 face value at a 10-percent...

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1. Suppose Kraus Intercable Company intends to issue perpetual bonds of $1,000 face value at a 10-percent interest rate.6 Annual coupons have been set at $100.

There is an equal chance that by the end of the year interest rates will do one of the following:

1. Fall to 6 2/3 percent. If so, the bond price will increase to $1,500.

2. Increase to 20 percent. If so, the bond price will fall to $500.

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