kic, inc

[bujin]

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?

[acw]

See what I just said on your question about Z-prime.