Note 1: Assume that bonds have semi-annual coupons unless told otherwise.

Note 2: In order to simplify, most of these questions are about perpetual bonds

Feel Good Clothing Inc plans to issue $5 million of bonds with a coupon rate of 12 percent and 30 years to maturity. The current market interest rates on these bonds is 11 percent. In one year, the interest rate on the bonds will be either 14 percent or 7 percent with equal probability. Assume investors are risk neutral.

(a) If the bonds are noncallable, what is the price of the bonds today?

(b) If the bonds are recallable one year from today at $1,450, will their price be greater than or less than the price you computed in (a)? Why? (Please note that this does not require any computations it is conceptual)