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%.
If the bond is priced at $1,000, what is the cost to the firm of the call provision?

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The Answer of 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%.
If the bond is priced at $1,000, what is the cost to the firm of the call provision?

A Firm Wishes to Issue a Perpetual Callable Bond