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Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 8.0 percent, payable annually. The one-year interest rate is 8.0 percent. Next year, there is a 35 percent probability that interest rates will increase to 10 percent, and there is a 65 percent probability that they will fall to 6 percent. A. What will the market value of these bonds be if they are non-callable? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) B. If the company decides instead to make the bonds callable in one year, what coupon rate will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) C. What will be the value of the call provision to the company? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
When a project has multiple rates of return:
You only need to know this background so that you can answer the related questions that are asked about your business. Answer each question as if you were serving on the board of your business or as a manager of the business.
Which of the following statements about bonds is true? Bond prices move in the same direction as market interest rates. If market interest rates change, long-term bonds will fluctuate more in value than short-term bonds. Long-term bonds are less risk..
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Which of the following is a disadvantage of funding a designated Roth account?
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Skylar Masterson borrowed $250,000 to buy her first home at an annual interest rate of 12 percent with monthly payments for 30 years. Ms. Masterson would like to pay off her loan ahead of schedule. What is the remaining unpaid balance when there are ..
Tom tells Bob that he will pay Bob $5,000 to put a cherry bomb in his gas tank so that Tom can collect money from the insurance policy on a new, cherry red sports car. If Bob carries out Tom’s wishes and places a cherry bomb in the gas tank of Tom’s ..
Calculate the current price of a $5,000 par value bond that has a coupon rate of 17 percent, pays coupon interest quarterly (i.e., 4 times per year), has 29 years remaining to maturity, and has a current yield to maturity (discount rate) of 9 percent
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