Problem:
Bowden Manufacturing intends to issue callable, perpetual bonds. The bonds are callable at $1,250. One year interest rates are 12 percent. There is a 60 percent probability that long-term interest rates one year from today will be 15 percent. With a 40 percent probability, long-term interest rates will be 8 percent. To simplify the firm's accounting, Bowden would like to issue the bonds at par ($1,000). What must the coupon on the bonds be for Bowden to be able to sell them at par?