O'Meara Inc. plans to issue $8 million of perpetual bonds. The face value of each bond is $1,000. The semi-annual coupon on the bond is 4.5% Market interest rate on one-year bonds are 8%. With equal probability, the long-term market interest rate will be either 12% or 6% next year. Assume investors are risk-neutral.
a. If the O'Meara bonds are noncallable, what is the price of the bonds?
b. If the bonds are callable one year from today at $1,250, will their price be greater than or less than the price you computed in (a)? Why?
This question was answered on: Sep 16, 2020
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