Beta plc plans to issue £10 million of bonds with a face valueof £1,000, a coupon rate of 6% and maturity of 10 years. The bondsmake annual coupon payments. The current yield to maturity of thesebonds is 5%. In one year, the yield to maturity on the bonds willbe either 6%, 5% or 4%, each with equal probability. Assumeinvestors are risk-neutral.

i) If the bonds are callable one year from today at 110% of facevalue, what is the price of the bonds today?

ii) What is the value of the call provision?

iii) What are the benefits to Beta from including a callprovision? What are the costs? How would your answers change for aput provision?