Question
KIC, Inc., plans to issue $7 million of bonds with a coupon rate of 7 percent and 10 years to maturity. The current market interest
KIC, Inc., plans to issue $7 million of bonds with a coupon rate of 7 percent and 10 years to maturity. The current market interest rates on these bonds are 9 percent. In one year, the interest rate on the bonds will be either 8 percent or 4 percent with equal probability. Assume investors are risk-neutral. |
a. | If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Price of the bonds |
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b. | If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in part a? | ||||
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