Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 9.5 percent, payable annually. The one-year interest rate is 9.5 percent. Next year, there is a 35 percent probability that interest rates will increase to 12 percent, and there is a 65 percent probability that they will fall to 7 percent.
a. What will the market value of these bonds be if they are noncallable?