(0.25 * 12) + (0.75 * 8) = 3 + 6 = 9%, the same as the current rate.
Assuming the par value is $1,000, then the call price (used as the new par value) is $1,300. We further need to assume annual interest payments and using an online financial calculator, the current price is $1,284.40 if the call has been announced and is certain. However, it is very unlikely that the company would be willing to pay such a huge premium to call this bond, if they only save 1% from the current yield.
http://www.zenwealth.com/BusinessFinance...
How would i compute a question involving a perpetual bond with a call that has a chance of 2 differing interest rates next year.
Heres the example
Pure Ltd has an outstanding perpetual bond with a 10 percent callable rate that can be called in 1 year.
the call premium is set at $300 over par. There is a 25% chance the interest rate will be 12% and a 75% chance it will be 8%. The current interest rate is 9%. Find the current price of the bond.
Please help am real stuck. Working is most important so i learn how to do this.
