20.6 KIC, Inc., plans to issue $5 million of perpetual bonds. The face value of each bond...
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20.6 KIC, Inc., plans to issue $5 million of perpetual bonds. The face value of each bond is
$1,000. The annual coupon on the bonds is 12 percent. Market interest rates on one-year bonds are 11 percent. With equal probability, the long-term market interest rate will be either 14 percent or 7 percent next year. Assume investors are risk-neutral.
a. If the KIC bonds are noncallable, what is the price of the bonds?
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 part (a)? Why?
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Related Book For 
Corporate Finance
ISBN: 9780071229036
6th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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