7. A convertible bond has the following features: Face Value: $1,000 Maturity: 2

Question

7. A convertible bond has the following features:

Face Value: $1,000
Maturity: 20 years
Annual coupon: $80
Conversion Price: $100
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 $75 per share?

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

e. If the stock price increases to $93 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

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.