Assets Inc Plans To Issue $5 Million Of Bonds With A Coupon Rate Of 7% A Par Value Of $1 000 Semiannual

Question

Assets, Inc. plans to issue $5 million of bonds with a coupon rate of 7%, a par value of $1,000, semiannual

coupons, and 30 years to maturity. The current market interest rate on these bonds is 6%. In one year, the interest rate on the bonds will be either 9% or 5% with equal probability. Assume investors are risk-neutral.

a. If the bonds are noncallable, what is the price of the bonds today?

b. If the bonds are callable one year from today at $1,080, will their price be greater or less than the price you computed in (a)? why?

Finance