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? (Enter your answer rounded to the nearest cent (E.g. 65.32).)

Reference no: EM132970564

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