KIC Inc plans to issue $5million of perpetual bonds. The face value of
each bond is
$1,000. The annual coupon on the bonds is 12%. Market interest rates
on one-year
bonds are 11%. With equal probability, the long-term market interest
rate will be
either 14% or 7% next year. Assume investors are risk-neutral.							
							
(a) If the KIC bonds are noncallable, what is the price of the bonds?							
(b) if the bonds are callable one year from today at $1,450, will
their price be greater than or less than the price you computed in
(a), why?