What coupon rate should the bonds have in order to sell

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Question - Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at $1,270. One-year interest rates are 11 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 10 percent. Assume that if interest rates fall the bonds will be called. What coupon rate should the bonds have in order to sell at par value? Assume a par value of $1,000.

Reference no: EM132150028

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