Principal $1,000 Maturity date 20 years Interest $80 (8% coupon) paid yearly Cal

Question

Principal

$1,000

Maturity date     

20 years

Interest             

$80 (8% coupon) paid yearly

Call price            

$1,050

Exercise price     

$65 a share

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

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.            Would you expect the bond to sell for its value as debt (i.e., the value determined in b) if the price of the stock were $52?

e.            If the price of the bond were $960, what are the premiums paid over the bond's value as stock and its value as debt?

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

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

Principal

$1,000

Maturity date     

20 years

Interest             

$80 (8% coupon) paid yearly

Call price            

$1,050

Exercise price     

$65 a share

Explanation / Answer

A) 16 SHARES

B) 80/.12 *( 1- 1/1.12^20) +1000/1.12^20

C) ANSWERIN PART B/ 52

D) IF ANSWER IN PART B>52 THEN FOR PREMIUM , IF< FOR DISCOUNT, IF = FOR PAR

E)PREMIUM PAID =$40

F)$35

G)65-52/52= .25

H) IT WOULD FALL INVESTORS RECEIVE 65*16.14

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