You have been hired to value a new 30-year callable, convertible bond. The bond

Question

You have been hired to value a new 30-year callable, convertible bond. The bond has a 5.3 percent coupon, payable annually. The conversion price is $99, and the stock currently sells for $38.40. The stock price is expected to grow at 10 percent per year. The bond is callable at $1,200, but, based on prior experience, it won’t be called unless the conversion value is $1,300. The required return on this bond is 7 percent.

What value would you assign to this bond? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

You have been hired to value a new 30-year callable, convertible bond. The bond has a 5.3 percent coupon, payable annually. The conversion price is $99, and the stock currently sells for $38.40. The stock price is expected to grow at 10 percent per year. The bond is callable at $1,200, but, based on prior experience, it won’t be called unless the conversion value is $1,300. The required return on this bond is 7 percent.

Explanation / Answer

Conversion ratio has to be ascertained in order to find the conversion values.

Lets say the price or conversion be = $1000/$99 therefore the ratio is = 10.10. The price would be @ $38.40 i.e. 38.40 (10.10) = $387.84

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