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(Solved) (Latest ver. Aug 2020) - O,Meara, Inc. Price of Bonds

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Week 4 - Problem 5

O,Meara, Inc., plans to issue $6 million of perpetual bonds.The face value of each bond is $1,000
The semi-annual coupon on the bonds is 4.5%
Market interest rates on one-year bonds are8%
With equal probability, the long-term market interest rate will be either 12%or6%
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?


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