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The Dorsey Decoding Device Corporation makes portable cryptographic decoders. The company sold $10 million of 25-year maturity bonds ten years ago. The bonds have a redemption (face) value of $1000 at maturity. The bonds pay an annual coupon rate of interest of 9 percent. The bonds are callable five years from now at a 9 percent premium over their face value of $1000. Investors currently require a 6 percent rate of return on bonds like these.
a. Ignoring the fact that these bonds are callable, how much would you expect to have to pay for one of these bonds today?
b. Now consider the valuation of these bonds if they are callable 5 years from now at a 10 percent premium over their face value of $1,000, and you expect the bonds to be called. How much would you expect to have to pay for one of these bonds today under those circumstances?
c. Given the facts in the problem, what is the best estimate of the value of one of these bonds today? Why? (No calculations necessary.)
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