Problem:
Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at $1,280. One-year interest rates are 12 percent. There is a 50 percent probability that long-term interest rates one year from today will be 17 percent, and a 50 percent probability that they will be 8 percent. Assume that if interest rates fall the bonds will be called.
Required:
What coupon rate should the bonds have in order to sell at par value?