Chung Wah company has decided to borrow money by issuing perpetual bonds with a coupon rate of 8%, payable annually, and a par value of $1,000. The 1-year interest rate is 8%. Next year, there is a 45% probability that interest rates will increases to 10% and a 55% probability that they will fall to 6%. a. What will the market value of these bonds be if they are noncallable? b. If the company decides instead to make the bonds callable in one year, what coupon will be demanded by the bondholders for the bonds to sell at par? Assume that the bonds will be called if interest rates fall and that the call premium is equal to the annual coupon. Question 2 Wah Hung company is considering whether to call Bond A which is currently outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The information about the bond issues is as follows: Coupon rate Face value outstanding Call premium Transaction cost of refunding Current YTM Bond A 7% $120,000,000 7.5% $11,500,000 6.25% The corporate tax rate is 40%. What is the NPV of the refunding for Bond A? Should the company refund the bond issue? Explain. Assume the call premium is tax deductible.