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Bowdeen Manufacturing intends to issue perpetual bonds redeemable with annual coupon payments. Bonds are redeemable at $1,225. The one-year interest rate is 11 percent. There
Bowdeen Manufacturing intends to issue perpetual bonds redeemable with annual coupon payments. Bonds are redeemable at $1,225. The one-year interest rate is 11 percent. There is a 60 percent chance that long-term interest rates one year from today will be 12 percent, and a 40 percent chance that they will be 10 percent. Assume that if interest rates fall, the bonds will be redeemed. What coupon rate must the bonds have to sell at par value? Assume a face value of $1,000.
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