Kowloon Industries wishes to issue a perpetual callable bond. The one-year interest rate is 8%. The bond makes annual coupon payments. There is 45% probability that long-term interest rates one year from today will be 9.25%, and a 55% probability that they will be 6%. The call premium is equal to the annual coupon. Assume that if interest rates fall, the bond will be called. a) What is the correct coupon amount if the bond is priced to sell at 940?

b) Based on the answer in the previous part, what is the value of the call provision to the company?