Problem:
KIC Inc. plans to issue $5 million of perpetual bonds. THe fave value of each bond is $1,000. The annual coupon bond is 12%. Market interest rates on one-year bonds are 11%. With eqaul probability, the long-term interest rates will be either 14% or 7% next year. Assume investors are risk-neutral.
A. If the KIC bond are noncallable, what is the price of the bonds?
B. if the bonds are callable one year from todayat $1,450, will their price be greater than or less than the price you computed in (A)? Why?