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Bond refunding

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shadabada1 | 08:31 Tue 23rd Sep 2008 | Business & Finance
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kic inc. plans to issue $5 million of perpetual bonds. The face value of each bond is $1000. The annual coupon on the bonds is 12% . Market interest rates on one year bonds are 11% with equal probability, the long term market interest rate will be either 14% or 7% next year. Assume investors are risk nuetral.
a) If the kic bonds are noncallable, what is the price of the bonds?
b) If the bonds are callable 1 year from today at $1450 will their price be greater than the price computed in (a), why?
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The answers you need are as follows:

a) �26.95

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