Given the following information concerning a convertible bond: Principal: $1,000
ID: 2748593 • Letter: G
Question
Given the following information concerning a convertible bond:
Principal: $1,000
Coupon: 5%
Maturity: 15 years
Call price: $1,050
Conversion price $37 (i.e., 27 shares)
Market price of the common stock: $32
Market price of the bond: $1,040
f) What is the premium in terms of debt that the investor pays when he or she purchase convertible bond instead of a nonconvertible bond?
g) If the price of the common stock should double, would the price of the convertible bond double? Briefly explain your answer
h) If the price of the common stock should decline by 50%, would the price of the convertible bond decline by the same percentage" Briefly explain your answer.
i) What is the probability that the corporation will call the bond?
j) Why are investors willing to pay the premiums mentioned in parts (d) and (f)?
Explanation / Answer
A) Value of Bond= 32*27 $864 Premium=$1040-$864 $176 B) Since the Value of Bond is less then the double of the price of Convertible bond. The Market price of convertible bond does not rise as repidly as the market price of common stock
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