Solved: Price of the bonds if kic bond are noncallable, Finance Basics

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Price of the bonds if kic bond are noncallable

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?

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Finance Basics: Price of the bonds if kic bond are noncallable

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Finance Basics: Price of the bonds if kic bond are noncallable

Reference No:- TGS02057843

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