You have been hired to value a new 10-year callable, convertible bond. The bond
ID: 2711064 • Letter: Y
Question
You have been hired to value a new 10-year callable, convertible bond. The bond has a coupon rate of 3.6 percent, payable semiannually, and its face value is $1,000. The conversion price is $57, and the stock currently sells for $44.
What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 4 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
What is the conversion premium for this bond? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
You have been hired to value a new 10-year callable, convertible bond. The bond has a coupon rate of 3.6 percent, payable semiannually, and its face value is $1,000. The conversion price is $57, and the stock currently sells for $44.
Explanation / Answer
You have been hired to value a new 10-year callable, convertible bond. The bond has a coupon rate of 3.6 percent, payable semiannually, and its face value is $1,000. The conversion price is $57, and the stock currently sells for $44.
a What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 4 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Straight Bond Value = pv(rate,nper,pmt,fv)
Nper (indicates the semi annual period) = 10*2 = 20
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 1000*3.6%*1/2 = 18
FV (indicates the face value) = 1000
Rate (indicates Half year YTM) = 94%*1/2 = 2%
Straight Bond Value = pv(2%,20,18,1000)
Straight Bond Value = 967.30
Conversion value = 1000 * 44/57 = $ 771.93
Minimum value of the bond = Max of Straight Bond Value or Conversion value
Minimum value of the bond = Max{967.30,771.93}
Minimum value of the bond = $ 967.30
b What is the conversion premium for this bond? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
conversion premium for this bond = Price of Convertible value of the bond - Current market value of Common Stock
conversion premium for this bond = 967.30 - 771.93
conversion premium for this bond = 195.37
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