Beta plc plans to issue 10 million of bonds with a face value of 1,000, a coupon rate of 6% and maturity of 10 years. The bonds make annual coupon payments. The current yield to maturity of these bonds is 5%. In one year, the yield to maturity on the bonds will be either 6%, 5% or 4%, each with equal probability. Assume investors are risk-neutral.

i) If the bonds are callable one year from today at 110% of face value, what is the price of the bonds today?

ii) What is the value of the call provision?

iii) What are the benefits to Beta from including a call provision? What are the costs? How would your answers change for a put provision?