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KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 6 percent and 20 years to maturity. The current market interest rates on these bonds are 9 percent. In one year, the interest rate on the bonds will be either 8 percent or 4 percent with equal probability. Assume investors are risk-neutral.
a. If the bonds are noncallable, what is the price of the bonds today? Assume a par value of $1,000 and semiannual payments. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Price of the bonds
b. If the bonds are callable one year from today at $1,060, will their price be greater or less than the price you computed in part a?
Greater than or less than