Given the following information concerning a convertible bond: Coupon: 6 percent

Question

Given the following information concerning a convertible bond:

Coupon: 6 percent (60 per 1000 bond)

excercise price: 25

maturity date 20 years

call price of the common stock: 30

a. If this bond were nonconvertible, what would be its approximate value if comparable interest rates were 9 percent?

b. how many shares can the bond be converted into?

c. what is the value of the bond in terms of stock?

d. what is the current minimum price that the bond will command?

e. is there any reason to anticipate that the firm will call the bond?

f. What do investors recieve if they do not convert the bond when it is called?

g. If the bond were called, would it be advantageous to convert?

Explanation / Answer

d) current minimum price of the bond is $1,000

e) since the current market price of the share is greater than the exercise price the company may call the bond as it is at a premium.

f)investors receives annual interest on the bond

g) currently it would be advantageous as a $1,000 bond is worth $1,200 in terms of shares.

a) years present value of payment present value factor at9% value of bond 1 to 20 60 9.129 547.74 20 1000 0.1784 178.4 value of nonconvertible bond 726.14

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