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Beta plans to issue perpetual bonds with face value of $1,000. The one-year market interest rate is 8%, while the annual coupon payment is $80.
Beta plans to issue perpetual bonds with face value of $1,000. The one-year market interest rate is 8%, while the annual coupon payment is $80. There is an equal chance that by the end of the year market rates will either (i) fall to 4% or (ii) increase to 16%. After the change in interest rates, the yield curve is expected to be flat (at 4% or 16%).
What is the value of the straight bond?
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