Problem: Neues Geschaft, Inc., has an outstanding perpetual bond with a 10% coupon rate that can be called in one year. The bonds make annual coupon payments.
The call premium is set at $150 over par value. There is a 40% chance that the interest rate in one year will be 12%, and a 60% chance that the interest rate will be 7%. If the current interest rate is 10%, what is the current market price of the bond?