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A company issues 20 year bonds with an 8% coupon paid annually the bonds have...

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Finance

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A company issues 20 year bonds with an 8% coupon paid annually the bonds have a par or face value of $1,000 and the current market interest rate for these bonds is 8%. The bonds can be called at the end of the second year with at a price of $1,125. At the end of the second year there is a 60% chance that interest rates will be 6% and a 40% chance that the interest rates will be 10% a) What is the current market price for this bond? (8 marks) b) Will the bond be called if interest rates are 6%? Why? (2 marks) A company issues 20 year bonds with an 8% coupon paid annually the bonds have a par or face value of $1,000 and the current market interest rate for these bonds is 8%. The bonds can be called at the end of the second year with at a price of $1,125. At the end of the second year there is a 60% chance that interest rates will be 6% and a 40% chance that the interest rates will be 10% a) What is the current market price for this bond? (8 marks) b) Will the bond be called if interest rates are 6%? Why? (2 marks)

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