1. Jack's Construction Co. has an outstanding 10-year bond that pays semi-annual coupons. It is a 5% coupon bond with a $1,000 par value and is currently selling at 105 percent of par. Because of potential changes in interest rates, the price of the Jacks bond could be $700 or $1,400 at the end of the year with 1/3 or 2/3 probability.

• What is the expected value of the Jacks bonds after 1 year?

• What is the expected value of the bonds after 1 year if they are callable at $1,150?

• What is the call premium?