1. Dooley, Inc., has outstanding $100 million (par value) bonds that pay an annual coupon rate of interest of 10.5 percent. Par value of each bond is $1,000. The bonds are scheduled to mature in 20 years. Because of Dooley’s increased risk, investors now require a 14 percent rate of return on bonds of similar quality with 20 years remaining until maturity. The bonds are callable at 110 percent of par at
the end of 10 years.
a. What price would the bonds sell for assuming investors do not expect them to be called?
b. What price would the bonds sell for assuming investors expect them to be called at the end of 10 years?