Bay Nuclear Power Plant (BNP) is considering raising funds $120 million over a short period. In its last management meeting, the finance director, Mani Lau (Mani), suggested that BNP issues perpetual bonds with a face value of $1,000 each with a coupon rate of 8.1% paid annually. The current market interest rate is 8%. Mani estimates a 0.3 probability that next years interest rate will increase to 10%, and a 0.7 probability that it will fall to 6%.

(b) The chairperson, Philips Chuang (Philips), decides to add a call provision into the bond contract and make the bonds callable in one year. Determine what the new coupon rate of the callable bonds should be if the bonds are issued at par. Assume that the bonds will be called if the interest rates fall and the call premium is set at $150 over par value. (Show your calculations).