Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 10 percent, payable annually. The one-year interest rate is 10 percent. Next year, there is a 45 percent probability that interest rates will increase to 12 percent, and there is a 55 percent probability that they will fall to 6 percent. What will the market value of these bonds be if they are noncallable?
Market value of the bonds
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