Given the information below, answer the following questions. A convertible bond

Question

Given the information below, answer the following questions.

A convertible bond has the following features:

Principal $1,000

Maturity date 20 years

Interest $80 (8% coupon)

Call price $1,050

Conversion Price $65 a share

a. What is this bond’s conversion right (round to 3 decimals)?

b. If comparable non-convertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt?

c. If the stock were selling for $52, what is the value of the bond in terms of stock?

d. What would be the minimum price (i.e., no premium) of the convertible bond given (b) and (c)?

e. If the price of the convertible bond were $960, what is the premiums paid given (b) and (c)?

f. If the price of the stock were $35, what would be the minimum price of the convertible bond?

g. What is the probability that the bond will be called when the price of the stock is $52?

h. If the price of the stock rose to $73, what would happen to the price of the convertible bond?

i. If the price of the stock were $73, what would the investor receive if the convertible bond were called?

Explanation / Answer

Ans a Convertible rigths Conversion ratio= $1000/$65 per shares price 15.385 So for every bond it can be converted into 15.385 shares Ans b Price of the bond = c × F × (1 (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Bond= Present value of Interest payments+Present value of the bond Price of Bond $1000*8%*(1-(1.12)^-20)/.12)+1000/(1.12)^20 80*(1-.1037)/.12)+1000*.1037 701.233 Ans Ans c As for every bond 5.385 shares can be converted and now the stock price is $52 Value of bond as stock 15.385*52 800 Ans Ansd The minimum price will be the price of non convertible bond as at this point i.e $701.233 At this point it is competitve with convertible bond in terms of maturity and degree of risk. Ans F Minimum price of the convertible bond=15.385*35 538.4615 Ans Dear student there are varius subparts I have answere 5

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