Problem:
Suppose a bond with a par value of $1000 pays an annual coupon payment of $100. Interest rates are currently at 7% for all maturities of the same default risk as this bond. The bond has 10 years until maturity but is callable beginning in 2 years at a $75 call premium (that is, for $1075.00).
a. If interest rates remain the same, would you expect the bond to be called in 2 years?
b. Given your answer in (a), what would be the current market price of this bond?
c. What level of interest rates would make the firm indifferent between calling the bond and having it remain outstanding?