Find what annual coupon should the bond pay in order to sell

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Problem 1: A firm intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,260. One-year interest rates are 8 percent. There is a 60 percent probability that long-term interest rates one year from today will be 12 percent, and a 40 percent probability that they will be 4 percent. Assuming that the bonds will be called if interest rates fall, what annual coupon should the bond pay in order to sell at par value?

Reference no: EM132970568

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