Question
Alpha Inc. has a $1,000 par value bond that was issued 10 years ago for a 30 year term. Interest rates were very high at
Alpha Inc. has a $1,000 par value bond that was issued 10 years ago for a 30 year term. Interest rates were very high at the time and the bond's coupon rate is 22%. The relevant bond market interest rate is now 10%. All of Alpha's bonds have a call feature. It allows the company to pay off the bond anytime after the first fifteen years, but requires that bondholders be compensated with an extra year's interest at the coupon rate if such a payoff is exercised. What is the bond's market price assuming investor expect it will be called as soon as possible?
Please show work, thank you.
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