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 6.1 percent coupon, payable annually. The conversion price is $103, and the stock currently sells for $45.10. The stock price is expected to grow at 13 percent per year. The bond is callable at $1,300, but, based on prior experience, it won’t be called unless the conversion value is $1,400. The required return on this bond is 9 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 6.1 percent coupon, payable annually. The conversion price is $103, and the stock currently sells for $45.10. The stock price is expected to grow at 13 percent per year. The bond is callable at $1,300, but, based on prior experience, it won’t be called unless the conversion value is $1,400. The required return on this bond is 9 percent.

Explanation / Answer

conversion value of the bond today is:

We expect the bond to be called when the conversion value increases to £1,400, so we need to find the number of periods it will take for the current conversion value to reach the expected value at which the bond will be converted. Doing so, we find

number of periods

Using NPER funtion find t =NPER(13%,0,437.86,-1400) =9.51 years

The bond will be called in 9.51years.

The bond value is the present value of the expected cash flows. The cash flows will be the annual coupon payments plus the conversion price. The present value of these cash flows is:

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