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Financial Accounting : Coupons, Non-callable and Callable Bonds

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O'Meara, Inc plans to issue $6 million of perpetual bonds. The face value of each bond is $1000. The semi-annual coupon on the bonds is 4.5%. Market interest rate 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 $1250, will their price be greater than or less than the price you computed in (a) ? Why?

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Coupons, Non-callable and Callable Bonds are investigated. The solution is detailed and well presented.

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