Explore BrainMass

# Current market price of the bond

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Neues Geschaft, Inc., has an outstanding perpetual bond with a 10% coupon rate that can be called in one year. The bonds make annual coupon payments.
The call premium is set at \$150 over par value. There is a 40% chance that the interest rate in one year will be 12%, and a 60% chance that the interest rate will be 7%. If the current interest rate is 10%, what is the current market price of the bond?

https://brainmass.com/economics/bonds/current-market-price-of-the-bond-300032

#### Solution Preview

The price of the bond today would be the present value of the cash flows from the bond.
We estimate the cash flows at the end of 1 year for the bond holders and then use these to calculate the price today.
If the interest rate in one year is 12%, the bonds would not be called as the price would be lower than the call ...

#### Solution Summary

The solution explains how to calculate the current market price of the bond

\$2.19