Callable Bonds and Selling Bonds at Par
Not what you're looking for?
Bowdeen Manufacturing intends to use callable perpetual bonds. The bonds are callable at $1,250. One-year interest rates are 12%. There is a 60$ probability that long-term interest rates one year from today will be 15%. With a 40% probability, long term interest rates will be 8%. To simplify the firm's accounting, Bowdeen would like to issue the bonds at par ($1,000). What must the coupon on the bonds be for Bowdeen to be able to sell them at par?
Purchase this Solution
Solution Summary
The solution explains how to calculate the coupon interest on callable bonds so that they can be sold at par. It includes about 200 words of explanation along with calculations of the coupon payment.
Solution Preview
If interest rates rise to 15%, the price of the Bowdeen bonds will fall, which means the bonds would not be
called since the price would be less than the call price. In that case, the bond would be worth C/.15 where C is the coupon payment since bonds are perpetual the present value would be the coupon payment/interest rate. The total bond holding would be ...
Purchase this Solution
Free BrainMass Quizzes
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Introduction to Finance
This quiz test introductory finance topics.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Lean your Process
This quiz will help you understand the basic concepts of Lean.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.