Problem:

Absalom Motors's 9% coupon rate, semiannual payment, $1,000 par value bonds that mature in 10 years are callable 9 years from now at a price of $1,100. The bonds sell at a price of $1,520, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds? Explain in detail and provide explanation.