Fifteen years ago, Roop Industries sold $ 400 million of convertible bonds. The

Question

Fifteen years ago, Roop Industries sold $ 400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $ 1000 par value. The conversion price was set at $ 62.75, and the common stock price was $55 per share.The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.75 At the time Roop's bonds were issued.
A) Calculate the premium on the bonds-that is, the percentage excess of the conversion price over the stock price at the time of the issue.
B) what is Roop's annual before-tax interest savings on the convertible issue versus a straight-debt issue?
C)At the time the bonds were issued, what was the value per bond of the conversion feature?

Explanation / Answer

The value of the convertion feature is the difference between what the bond is sold for with the feature - the value of a bond without the feature. Value of bond without: 40 n 8.75 i 5.75 pmt 100 fv pv = 66.91 Value of feature = 100 (since sold at par) - 66.91 = 33.08% or $330.8 per $1000 par value

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