Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 9.5 percent, payable annually. The one-year interest rate is

Williams Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 9.5 percent, payable annually. The one-year interest rate is 9.5 percent. Next year, there is a 35 percent probability that interest rates will increase to 12 percent, and there is a 65 percent probability that they will fall to 7 percent. Assume a par value of $1,000.

a.

What will the market value of these bonds be if they are noncallable? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Market value $

b.

If the company decides instead to make the bonds callable in one year, what coupon rate 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. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Coupon rate %

c.

What will be the value of the call provision to the company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Value of the call provision $

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technical Analysis Of Stock Trends

Authors: Robert D. Edwards, John Magee, W.H.C. Bassetti

11th Edition

1032241829, 978-1032241821

More Books

Students also viewed these Finance questions

Question

Describe four common misunderstandings of Gestalt psychology.

Answered: 1 week ago