Question

New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. The bond makes annual coupon payments. The call premium is set at $115 over par value. There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 8 percent. If the current interest rate is 11 percent, what is the current market price of the bond? Assume a par value of $1,000. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Bond value in 1 Year if Interest rate is 11%	$                            956.15	=110/13%+110
Bond value in 1 Year if Interest rate is 7%	$                        1,485.00	=110/8%+110
Current market price	$ 1,051.97	=(956.15*60%+1485*40%)/(1+11%)