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Hello,

I don't understand how does this work. Can you help and explain?

Thank you for your help! :)

Given the following information concerning a convertible bond:

• Principal: $1,000

• Coupon: 5 percent

• 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

a. What is the current yield of this bond?

b. What is the value of the bond based on the market price of the common stock?

c. What is the value of the common stock based on the market price of the bond?

d. What is the premium in terms of stock that the investor pays when he or she purchases the convertible bond instead of the stock?

e. Nonconvertible bonds are selling with a yield to maturity of 7 percent. If this bond lacked the conversion feature, what would the approximate price of the bond be?

f. What is the premium in terms of debt that the investor pays when he or she purchase the convertible bond instead of a non-convertible bond?

g. What is the probability that the corporation will call this bond?

h. Why are investors willing to pay the premiums mentioned in questions d and f?

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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Hello,

I'm struggling in this. Don't understand how to solve the problem. I am hoping that you can be able to help & explain. I appreciate your help. :)

Given the following information concerning convertible bond:
• Coupon: 6 percent ($60 per $1,000 bond)
• Exercise price: $25
• Maturity date: 20 years
• Call price: $1,040
• Price of the common stock: $30

a. If this bond were nonconvertible, what would be its approximate value if comparable interest rates were 9 percent?
b. How many shares can the bond be converted into?
c. What is the value of the bond in terms of stock?
d. What is the current minimum price that the bond will command?
e. Is there any reason to anticipate that the firm will call the bond?
f. What do investors receive if they do not convert the bond when it is called?
g. If the bond were called, would it be advantageous to convert?

You have been hired to value a new 10-year callable, convertible bond. The bond has a coupon rate of 3.6 percent, payable semiannually, and its face value is $1,000. The conversion price is $57, and the stock currently sells for $44.
a.

What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 4 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Minimum value of the bond $
b.

What is the conversion premium for this bond? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Conversion premium %

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?

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