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Input area: Coupon rate One year interest rates Par value 5.80% 5.80% 1,000 $ Probability of rate in one year Rate in one year 35% 7% Probability of rate in one year Rate in one year 65% 4% Output area: a. Price in one year If interest rates are Price If interest rates are Price Price today b. Coupon payment Coupon rate c. Noncallable bond value Value of call option 11. Valuing Callable Bonds Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 5.8 percent, payable annually, and a par value of $1,000. The one-year interest rate is 5.8 percent. Next year, there is a 35 percent probability that interest rates will increase to 7 percent and a 65 percent probability that they will fall to 4 percent. a. What will the market value of these bonds be if they are noncallable? b. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. c. What will be the value of the call provision to the company? | Input area: Coupon rate One year interest rates Par value 5.80% 5.80% 1,000 $ Probability of rate in one year Rate in one year 35% 7% Probability of rate in one year Rate in one year 65% 4% Output area: a. Price in one year If interest rates are Price If interest rates are Price Price today b. Coupon payment Coupon rate c. Noncallable bond value Value of call option 11. Valuing Callable Bonds Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 5.8 percent, payable annually, and a par value of $1,000. The one-year interest rate is 5.8 percent. Next year, there is a 35 percent probability that interest rates will increase to 7 percent and a 65 percent probability that they will fall to 4 percent. a. What will the market value of these bonds be if they are noncallable? b. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. c. What will be the value of the call provision to the company? |