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Question 1 (25%) Lenguard Inc. is planning to issue a perpetual bond now. Based on the company credit rating, its borrowing rate is currently 8%.
Question 1 (25%) Lenguard Inc. is planning to issue a perpetual bond now. Based on the company credit rating, its borrowing rate is currently 8%. At the end of year 1, there is 35% chance that its borrowing rate will be 5% and 65% chance that it will be 10%. Then the company expects its borrowing rate will stay at that level forever. a. If coupon rate is 8% and the bond is non-callable, what is the price of the bond? b. If the bond is callable at its face value of $1,000 plus two additional coupon payments at the end of year 1, what is the price of this callable bond? C. If Lenguard wants to sell the callable bond in part b above at $1,000, what must be the coupon rate
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