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Question - Dooley, Inc., has outstanding $150 million (par value) bonds that pay an annual coupon rate of interest of 11.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 15 years. Because of Dooley's increased risk, investors now require a 14 percent rate of return on bonds of similar quality with 15 years remaining until maturity. The bonds are callable at 109 percent of par at the end of 9 years.
Required -
a. What price would the bonds sell for assuming investors do not expect them to be called?
b. What price would the bonds sell for assuming investors expect them to be called at the end of 9 years?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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