Junk Corp.\'s high-yield bond has the following features: Principal $1,000 Coupo

Question

Junk Corp.'s high-yield bond has the following features: Principal $1,000 Coupon 10% Maturity 5 years Special features: Company may extend the life of the bond to 10 years a) If interest rates are currently 12 percent on comparable high-yield securities and are not expected to change, what is the price of this bond? b) If interest rates are currently 9 percent on comparable high-yield securities and are not expected to change, what is the price of this bond? c) If interest rates are currently 9 percent on comparable high-yield securities but the investor has no forecast as to future rates, what is the possible range of prices for this bond?

Explanation / Answer

Assuming annual payments:

A) $927.90

B) $1,038.90

C) $1,038.90 - $1,064.18

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