A convertible bond has the following features: Face Value: $1,000 Maturity: 20 y

Question

A convertible bond has the following features:

Face Value: $1,000

Maturity: 20 years

Annual coupon: $80

Conversion Price: $80

Market Price of the Convertible Bond: $800

A) The bond may be converted into how many shares?

B) What is the current value of the convertible as a bond if prevailing interest rates are 11%?

C) What is the current value of the convertible as a stock if the current stock price is $60 per share?

D) Based on (b) and (c), what is the premium reflected in the Market Price?

E) If the stock price increases to $73 per share and the premium stays the same, what is the expected Market Price of the convertible?

Explanation / Answer

a)

no of shares = 800/100 = 8

b)

current value

= 80 * [1-(1+0.11)^-20]/0.11 + 1000/1.11^20

= 761.10

c)

current value = 8 * 75 = 600

d)

premium = 161.10

e)

market price = 161.10 + 93 * 8 = 905.10

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