Lisa's new firm plans to issue a permanent callable bond with a par value of $1,000 and a nominal rate of 5% yearly. The nominal interest rate on these bonds will be 8% next year. Then a year from now, the bond's nominal interest rate will be 9% or 6% with the equal probability(50%). These bonds can be redeemed for $1350. If the bond is called when the interest rate decreases, calculate the callable bond price for today?
Lisa's new firm plans to issue a permanent callable bond with a par value of $1,000 and a nominal rate of 5% yearly. The nominal interest rate on these bonds will be 8% next year. Then a year from now, the bond's nominal interest rate will be 9% or 6% with the equal probability(50%). These bonds can be redeemed for $1350. If the bond is called when the interest rate decreases, calculate the callable bond price for today?
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 4P
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Lisa's new firm plans to issue a permanent callable bond with a par value of $1,000 and a nominal rate of 5% yearly. The nominal interest rate on these bonds will be 8% next year.
Then a year from now, the bond's nominal interest rate will be 9% or 6% with the equal probability(50%). These bonds can be redeemed for $1350.
If the bond is called when the interest rate decreases, calculate the callable
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