A convertible bond has a 7 percent coupon, paid semiannually, and will mature in

Question

A convertible bond has a 7 percent coupon, paid semiannually, and will mature in 18 years. If the bond were not convertible, it would be priced to yield 6 percent. The conversion ratio on the bond is 20 and the stock is currently selling for $40 per share. What is the minimum value of this bond?

A convertible bond has a 7 percent coupon, paid semiannually, and will mature in 18 years. If the bond were not convertible, it would be priced to yield 6 percent. The conversion ratio on the bond is 20 and the stock is currently selling for $40 per share. What is the minimum value of this bond?

Explanation / Answer

Answer

Conversion Value = $40*Conversion ratio

Conversion Value = $40*20 =$800

Suppose the face value =$1,000
Coupon Rate
=6%
Annual Coupon
=$1000*6%
=$60
Half yearly
=$60/2
=$30
And No. of Years
=18*2=36
Bond Value = 30/(1+.03)^1+30/(1+0.03)^2+.........................30/(1+0.06)^36

Time period bond value 1 30.90 2 31.90 3 32.78 4 33.77 5 34.78 6 35.82 7 36.90 8 38.00 9 39.14 10 40.32 11 41.53 12 42.77 13 44.06 14 45.38 15 46.74 16 48.14 17 49.59 18 51.07 19 52.61 20 54.18 21 55.81 22 57.48 23 59.21 24 60.98 25 62.81 26 64.70 27 66.64 28 68.64 29 70.70 30 72.82 31 75.00 32 77.25 33 79.57 34 81.96 35 84.42 36 86.95 Total value of bond 1955.30

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