Question
Firm XYZ has decided to issue a perpetual bond. The bond has a face value of $1,000 and makes 10% annual coupon payments. The current
Firm XYZ has decided to issue a perpetual bond. The bond has a face value of $1,000 and makes 10% annual coupon payments. The current discount rate on the bond is 8%. There is a 35% probability that the discount rate on the bond one year from today will increase to 10%, and a 65% probability that it will decline to 5%.
4a) What is the current price of the bond, if the bond is non-callable? (5%)
4b) (i) If XYZ decides instead to make the bond callable in one year with a call price at $1,400 per bond, when (if ever) should the company choose to exercise the call option? Explain.(4%)
(ii) Will the callable bond have a higher or lower current price compared to the non-callable bond in part (4a)? (2%)
4c) What is current price of the callable bond? (5%)
4d) What is the current value of the call provision to XYZ? (6%)
4e) Lately capital market expects there will be large amounts of debt financing activities by corporates until the end of 2021. Please provide THREE possible factors.(3%)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started