An investment company recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $25 a share. At the time of issue, the company's underlying stock price is $20.
a. Calculate the convertible issue's conversion ratio?
b. After issuance, will the bond likely increase, decrease, or not change in value if the underlying stock price changes to $23 per share and everything else remains constant? Why?
c. The bondholder converts the bond to common stock when the price of the underlying stock reaches $35. What is the total market value of the new shares?
d. How does the company's balance sheet change at the point the bondholders convert their bonds to common stock? Explain?
e What are 3 advantages to the investor in buying convertible bonds instead of the stock itself?
An investment company recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $25 a share. At the time of issue, the company's underlying stock price is $20.
a. Calculate the convertible issue's conversion ratio?
b. After issuance, will the bond likely increase, decrease, or not change in value if the underlying stock price changes to $23 per share and everything else remains constant? Why?
c. The bondholder converts the bond to common stock when the price of the underlying stock reaches $35. What is the total market value of the new shares?
d. How does the company's balance sheet change at the point the bondholders convert their bonds to common stock? Explain?
e What are 3 advantages to the investor in buying convertible bonds instead of the stock itself?
Related questions
ou are the CFO of RealNetworks on Julyâ 1, 2008. Theâ company's stock price is $9.74 and its convertible debt is now callable. See the tableâ below:
| Convertible Subordinated Notes | |
| Issued under U.S. SEC Rule 144A | |
| Aggregate principal amount | â$100 million |
| Proceeds net of offering costs | â$97.0 million |
| Coupon | â0% |
| Conversion ratio | 107.5650 shares per $1,000 principal amount |
| Call date | Julyâ 1, 2008 |
| Call price | â100% |
| Maturity | Julyâ 1, 2010 |
a. What is the value of the shares the bondholders would receive per $1,000 bond if theyâ convert?
b. What is the value per $1,000 bond they would receive under theâ call?
c. If you call theâ bonds, will the bondholders convert into shares or accept the callâ price?
