PG Enterprises (PGE), currently has assets with a market value of $100.Next year the market value of PGE's assets is going to increase by 10% or decrease by 40% dependingon the state of the economy. The annual risk-free rate of interest is 0%. PGE has one share of commonstock issued and outstanding as well as one zero coupon corporate bond outstanding with a face value of$100 maturing next year at t = 1. The corporate bond has no callable, puttable or convertible features.

(a) Find today's value of PGE's corporate bond and common stock. What is the promisedyield to maturity of the corporate bond equal to?

(b) Now suppose that we make the corporate bond callable (at the discretion of the company)at $90. In other words, the company has the right to pay bondholders $90 instead of the full face value of$100 at the maturity of the bond. What is today's value of PGE's callable corporate bond and commonstock? What is the promised yield to maturity (YTM)? How about the promised yield to call (YTC)?

(c) Finally, suppose that we make the corporate bond puttable (at the discretion of thebondholder) at $105. In other words, the bondholder has the right to be paid $105 instead of the fullface value of $100 at the maturity of the bond provided the company has sufficient funds to make thehigher payment. What is today's value of PGE's puttable corporate bond and common stock? What isthe promised yield to maturity (YTM)? How about the promised yield to put (YTP)?