A convertible bond has the following features: Face Value: $1,000 Maturity: 10 y

Question

A convertible bond has the following features:

Face Value: $1,000

Maturity: 10 years

Annual coupon: $80

Call Price: $1,100

Conversion Price: $50

Current Market Price of the Convertible Bond: $955

I.The bond may be converted into how many shares?

II.What is the current value of the convertible as a bond if prevailing interest rates are 9%?

III.What is the current value of the convertible as a stock if the current stock price is $45 per share?

IV.Based (II) and (III), what is the intrinsic value of the convertible bond?

V.Based on (II) and (III), what is the current premium of the convertible bond?

VI.With 5 years to maturity, the current stock price is now $56 per share and prevailing interest rates are 5%, what would be the intrinsic value of the convertible bond?

VII.Given the answer in (V), what would the holder of the convertible receive if the convertible is called prior to conversion?

Explanation / Answer

I) 1,000/50= 20 shares

II) 935.82 (using a financial calculator)

III) 45*20=900

IV)45*20=900

V) 935.82-900=35.82

VI) (56)*20= 1120

VII) 1100

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