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Determining the price of bonds today of xyz corporation

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Reference no: EM132418418

Problem: XYZ Corporation plans to issue perpetual bonds (par value = $1,000) with a coupon rate of 8% paid annually. The current market interest rates on these bonds are 7%. In one year, the interest rate on the bonds will be either 10% or 4% with equal probability.

Requirement:

  1. If the bonds are noncallable, what is the price of the bonds today?
  2. If the bonds are callable one year from now at $1,100, what is the price of the bonds today?
  3. What is the compensation for bearing the call risk of XYZ's callable bonds?

Reference no: EM132418418

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