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    O,Meara, Inc. Price of Bonds

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    Week 4 - Problem 5

    O,Meara, Inc., plans to issue $6 million of perpetual bonds.The face value of each bond is $1,000
    The semi-annual coupon on the bonds is 4.5%
    Market interest rates on one-year bonds are 8%
    With equal probability, the long-term market interest rate will be either 12% or 6%
    next year. Assume investors are risk-neutral.

    a. If the O'Meara bonds are noncallable,what is the price of the bonds?

    b. If the bonds are callable one year from today at $1,250, will their price be greater than
    or less than the price you computed in (a)? Why?

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    Solution Summary

    The solution explains how to calculate the price of perpetual bonds given the probability of interest rates and whether the bonds are callable or non-callable.