Question

A certain 5% annual coupon rate convertible bond​ (maturing in 20​ years) is convertible at the​ holder's option into 17 shares of common stock. The bond is currently trading at $790. The stock​ (which pays 56¢ a share in annual​ dividends) is currently priced in the market at ​$33.79 a share.

QUESTIONS: HUGE THUMBS UP FOR CORRECT ANSWERS

a. The​ bond's conversion price is (blank) $ ? (Round to the nearest​ cent.)

b. The conversion ratio is (blank) shares ?   ​(Round to the nearest​ integer.)

c. The conversion value of this issue is (blank) $ ? (Round to the nearest​ cent.)

The conversion parity of this issue is (blank) $ ? (Round to the nearest​ cent.)

d.. The conversion premium in dollars is (blank) $ ? (Round to the nearest​ cent.)

The conversion premium as a percentage is (blank) % ? ​(Round to two decimal​ places.)

e. The​ bond's payback period is (blank) years ?  ​(Round to one decimal​ place.)

f.  . If comparably​ rated, nonconvertible bonds sell to yield 7 % .what is the investment value of the​ convertible?

The investment value of the convertible is (blank) $ ? (Round to the nearest​ cent.)

Answer 1

a]

conversion price = price of bond / conversion ratio

conversion ratio = number of shares receivable per bond on conversion = 17

conversion price = $790 / 17 = $46.47

b]

conversion ratio = number of shares receivable per bond on conversion = 17

c]

Conversion value = number of shares receivable per bond on conversion * market price per share

Conversion value = 17 * ​$33.79 = $574.43

Conversion parity price = price of bond / conversion ratio

Conversion parity price = $790 / 17 = $46.47

d]

Conversion premium in dollars = Bond Price - (Stock Price × Conversion Ratio)

Conversion premium in dollars = $790 - ($33.79 × 17) = $215.57

Conversion premium as a percentage = conversion premium / (Stock Price × Conversion Ratio)

Conversion premium as a percentage = $215.57 / ($33.79 × 17) = 37.53%