Pacheco Inc. issued convertible bonds 10 years ago. Each bond had an initial ter
ID: 2761706 • Letter: P
Question
Pacheco Inc. issued convertible bonds 10 years ago. Each bond had an initial term of 30 years, had a face value of $1,000, paid a coupon rate of 11%, and was convertible into 20 shares of Pacheco stock, which was selling for $30 per share at the time. Since then the price of Pacheco shares has risen to $65 and the interest rate has dropped to 8.4%. What are the bonds worth today? Assume bond coupons are paid semiannually. Round the answer to the nearest cent. Please show how to get [PVFA 4.2, 40]
Explanation / Answer
Assuming the bond coupons are paid semiannually: semiannual coupon rate = 5.5%, interest rate = 4.20% and number of tenuers = 40
So,
the bonds worth today = (1000 * 5.5%) * PVIFA(4.20%,40) + 1000 * PVIF(4.20%,40)
We calculate the value of PVIFA(4.20%,40) & PVIF(4.20%,40) from the PVIFA & PVIF Calculator by putting in the value of interest rate and number of period.
So, the bonds worth today = 55 * 19.2171 + 1000 * 0.1929 = $1249.84
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