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New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rate of 9 percent that can be called in one year. The bond
New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rate of 9 percent that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $150 over par value. There is a 60 percent chance that the interest rate in one year will be 11 percent, and a 40 percent chance that the interest rate will be 7 percent. If the current interest rate is 9 percent, what is the current market price of the bond?
Coupon rate Call premium Par value $ $ GAGA 9.00% 150 1,000 Probability of rate in one year Rate in one year 60% 11% Probability of rate in one year Rate in one year 7% Current interest rate 9% Output area: Coupon payment Call price Price in one year: If interest rates are Discounted price Price If interest rates are Discounted price Price Price today Coupon rate Call premium Par value $ $ GAGA 9.00% 150 1,000 Probability of rate in one year Rate in one year 60% 11% Probability of rate in one year Rate in one year 7% Current interest rate 9% Output area: Coupon payment Call price Price in one year: If interest rates are Discounted price Price If interest rates are Discounted price Price Price todayStep by Step Solution
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