Question

Kowloon Industries wishes to issue a perpetual callable bond. The one-year interest rate is 8%. The...

Kowloon Industries wishes to issue a perpetual callable bond. The one-year interest rate is 8%. The bond makes annual coupon payments. There is 45% probability that long-term interest rates one year from today will be 9.25%, and a 55% probability that they will be 6%. The call premium is equal to the annual coupon. Assume that if interest rates fall, the bond will be called. The face value of bond is $1000. Report the final numerical answers only and do not report equations or other symbols. Keep two digits after the decimal points if the answer is not an integer, (e.g., 1.23).

A) What is the correct coupon amount if the bond is priced to sell at 940 now?

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Answer #1

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