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Calculate the price of the callable bond

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Reference no: EM133004810

GoGoAUCity Inc. plans to issue a perpetual callable bond that pays 11.39% annual coupons. The current interest rate is 8%. Two years later, there is 16% probability that the interest rate will be 4.6%, 31% probability that the interest rate will be 10.1% and 53% probability that the interest rate will be 12.1%. The bond is callable at par value of 1,000 plus 3 additional coupon payments and it will be called if the bond price is greater than the call price.

-Calculate the price of the callable bond.

-What is the value of the call option?

-What is the minimum coupon rate that the bond will be certainly called in two years?

Reference no: EM133004810

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