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 9%. Next year, there is a 40% chance that the interest rate will be 5% and a 60% chance that the rate will be 13.3333%. The
Bond is callable at €1,090, and it will be called if the interest rate drops to 5%.
If the bond is priced at €1,000, what is the cost to the firm of the call provision?

A) €118.67
B) €292.43
C) €300.00
D) €318.56
E) €350.00