Question

This is the second time, I asked for this question,becasue the other answer: Current price= 1142.20 is not correcr, can you help me resolve this problem please!

New Business Ventures, Inc., has an outstanding perpetual bond with a coupon rate of 9 percent that can be called in one year. The bond makes annual coupon payments. The call premium is set at $155 over par value. There is a 60 percent chance that the interest rate in one year will be 11 percent, and a 40 percent chance that the interest rate will be 6 percent. If the current interest rate is 9 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.)

    

Current market price

$

Answer 1

Par Value = $1000 ; Annual coupon = $90 ;

Value of perpetual bond when interest rates are 11% = 90/11% = 818.18

Value of perpetual bond when interest rates are 6% = 90/6% = 1500 ; at this rate, it may be beneficial to recall the bond (call price is $1155) and refinance them at lower interest rate. Hence in this case the value of the bond will be capped at $1155.

Hence the expected price of the bond next year will be : 818.18 * 60% + 1155*40% = 952.91

Thus the present time price = 952.91/(1+9%) = $874.23

answered by: anonymous