New business ventures, inc., has an outstanding perpetual bond with a coupon rate of 11 percent that can be called in one year. the bond makes annual coupon payments and has a par value of $1,000. the call premium is set at $125 over par value. there is a 60 percent chance that the interest rate in one year will be 13 percent, and a 40 percent chance that the interest rate will be 9 percent. if the current interest rate is 11 percent, what is the current market price of the bond? (do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

961.88

Explanation:

First, examine whether the bond will be called if interest rate falls to 9%. The call price is

1,000 + 125 = 1,222. Bond price at 9% yield will be

$110/0.13 > call price of 846.15

Bond will be called. The price of the callable bond therefore is:

=+[.60(846.15)+.40(1125)]/1.11+110/1.11 =961.88

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