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solution

KIC, Inc., plans to issue $5 million of bonds with a coupon rate
of 8 percent and 20 years to maturity. The current market interest
rates on these bonds are 7 percent. In one year, the interest rate
on the bonds will be either 12 percent or 4 percent with equal
probability. Assume investors are risk-neutral.

a.

If the bonds are noncallable, what is the price of the bonds
today? Assume a par value of $1,000 and semiannual
payments. (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.)

Price of the bonds $
b.

If the bonds are callable one year from today at $1,150, will
their price be greater or less than the price you computed in
part a?

multiple choice

  • Greater than

  • Less than

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