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Finance Problem
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KIC, Inc., plans to issue $5 million of perpetual bonds. The face value of each bond is $1,000. The annual coupon on the bonds is 12 percent. Market interest rates on one-year bonds are 11 percent. With equal probability, the long-term market interest rate will be either 14 percent or 7 percent next year. Assume investors are risk-neutral.
A. If the KIC bonds are noncallable, what is the price of the bonds?
B. If the bonds are callable one year from today at $1,450, will their price be greater than or less than the price you computed in (a)? Why?
A. If the KIC bonds are noncallable, what is the price of the bonds?
B. If the bonds are callable one year from today at $1,450, will their price be greater than or less than the price you computed in (a)? Why?
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