Junk Corp.'s high-yield bond has the following features:
Principal $1,000
Coupon 10%
Maturity 5 years
Special features: Company may extend the life of the bond to 10 years
a. If interest rates are currently 12 percent on comparable high-yield securities and are not expected to change, what is the price of this bond?
b. If interest rates are currently 9 percent on comparable high-yield securities and are not expected to change, what is the price of this bond?
c. If interest rates are currently 9 percent on comparable high-yield securities but the investor has no forecast as to future rates, what is the possible range of prices for this bond?
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