Problem 24-11 Calculating Values for Convertibles [LO6] You have been hired to v

Question

Problem 24-11 Calculating Values for Convertibles [LO6]

You have been hired to value a new 20-year callable, convertible bond. The bond has a 7.6 percent coupon, payable semiannually, and its face value is $1,000. The conversion price is $71, and the stock currently sells for $58.

What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 8 percent. (Do not round your intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

What is the conversion premium for this bond? (Round your answer to 2 decimal places. (e.g., 32.16))

You have been hired to value a new 20-year callable, convertible bond. The bond has a 7.6 percent coupon, payable semiannually, and its face value is $1,000. The conversion price is $71, and the stock currently sells for $58.

Explanation / Answer

coupon rate = 7.6%/2 = 3.8%

coupon value = 3.8%*1000 = 3.8

Normal bond price = 38*(PVIFA 4%,40 ) + 1000/1.04^40

   = 38*19.7928 + 1000*0.2083

= 960.43

conversion ratio = 1000/71 = 14.08

conversion value = 14.08*58 = 816.90

Minimum value of bond = Max(960.43? , 816.90?) = 960.43

2)

conversion premium = difference between the current stock price and conversion price, divided by the current stock price

conversion premium =? (71-58)/58 = 0.224138 = 22.41%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.