New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $125 over par value. There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current market price $ 1,000.00

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
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New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon
rate of 11 percent that can be called in one year. The bond makes annual coupon
payments and has a par value of $1,000. The call premium is set at $125 over par value.
There is a 60 percent chance that the interest rate in one year will be 13 percent, and a
40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11
percent, what is the current market price of the bond? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current market price $ 1,000.00
Transcribed Image Text:New Business Ventures, Incorporated, has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The call premium is set at $125 over par value. There is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. If the current interest rate is 11 percent, what is the current market price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current market price $ 1,000.00
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