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GoGo Inc. plans to issue a perpetual callable bond that pays 11.4% annual coupons. The current interest rate is 8%. Two years later, there is 15% probability that the interest rate will be 4.5%, 30% probability that the interest rate will be 10% and 55% probability that the interest rate will be 12%. 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?
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