Question: (Callable bond) Frankfort corporation has an outstanding 15% bond that pays interest semi-annually. The 30-year bond has 20 years until maturity and has a face value of $1,000. Frankfort, realizing that the bonds were issued at a relatively high interest rate era, has a call feature in the indenture of the bond. This feature requires Frankfort to pay one year of interest in the event that Frankfort calls the bond. The bonds are callable after 10 years upon issuance.
a. If the bond is not expected to be called, what is the price of the bond?
b. If the bond is expected to be called, what is the price of the bond?