A fiRm Wishes to Issue a Perpetual Callable Bond

Multiple Choice

A firm wishes to issue a perpetual callable bond. The current interest rate is 7%. Next year, the interest rate will be 6.5% or 8.25% with equal probability. The bond is callable at €1,075, and it will
Be called if the interest rate drops to 6.5%.
What is the cost of the call provision to the firm if the bond sells for €1,000 today?

A) €-71.43
B) € 0.00
C) € 77.43
D) €178.57
E) None of the above.