Laidler AG wishes to issue perpetual bonds with a face value of these will have a coupon rate. Coupons will be paid annually. Laidler will set a call premium at over face value. For simplicity, assume these bonds can only be called at the end of the first year. Also assume there is an equal chance that by the end of the year interest rates will do one of the following:

Fall to If so the bond price will increase to Increase to If so the bond price will fall to

a Show that if the bond is not callable, its expected value to an investor today is

worth The appropriate discount rate is