KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 8 percent and 30 years to maturity. The current market interest rates on these bonds are 7 percent. In one year, the interest rate on the bonds will be either 10 percent or 6 percent with equal probability.
Assume investors are risk-neutral. If the bonds are nonsalable, what is the price of the bonds today?
If the bonds are callable one year from today at $1, 080, will their price be greater or less than the price you computed in (a)? Why?