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%

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