Company decided to borrow money by issuing perpetual bonds with coupon rate of 7.5%, payable annually. The one year interest rate 7.5%. Next year, there is 40% probability interest rate will increase to 8%, there is 40% chance rates will fall to 5%. Assume par $1000. A. If co decides to make bonds callable in 1 year what coupon rate will be demanded by bond holders to sell at par? Coupon rate?

B. What will value of the Call provision to the company?