A fiRm Wishes to Issue a Perpetual Callable Bond

question 27

Multiple Choice

A firm wishes to issue a perpetual callable bond. The current interest rate is 9%. Next year, there is a 40% chance that the interest rate will be 5% and a 60% chance that the rate will be 13.3333%. The
Bond is callable at €1,090, and it will be called if the interest rate drops to 5%.
What is the bond's value today if the coupon is set at €100?

• A)€867.54
• B)€900.00
• C)€904.69
• D)€945.57
• E)€1000.00

---

Definitions:

Lower Control Limit

The lowest boundary in control charts that indicates the threshold below which a process may be out of control.

Population Mean

The average value of a set of characteristics within an entire population.

Confidence Interval

A breadth of values, resulting from sample statistics, presumed to harbor the value of an undetected population parameter.

Confidence Level

The probability, expressed as a percentage, that a statistical parameter (e.g., mean) for a population lies within a specified confidence interval.