Question

# You have been hired to value a new 20-year callable, convertible bond. The bond has a...

 You have been hired to value a new 20-year callable, convertible bond. The bond has a coupon rate of 5.5 percent, payable annually. The conversion price is \$101, and the stock currently sells for \$51.10. The stock price is expected to grow at 11 percent per year. The bond is callable at \$1,200, but based on prior experience, it won't be called unless the conversion value is \$1,300. The required return on this bond is 9 percent.

 What value would you assign to this bond? (Do not round intermediate calculations and round your answer to 2 decimal places., e.g., 32.16.)

 Bond value \$

Considering, PAR value / Convertible market value of Bond: \$1300

Number of Years: 20

Coupon Value: 0.055 * 1300: \$71.5

Interest Rate: 9%

Hence, straight value of the Bond from the formula:

Bond Price: \$884.65

Conversion Price: \$101

Convertible Price: \$1300

Hence: Conversion Ratio: 1300 / 101

: 12.87

Since, current value of the stock: \$51.1

Hence, Conversion Value of Bond: 12.87 * 51.1

: \$657.66

The minimum value assign to this bond is the straight bond value of \$884.65.

#### Earn Coins

Coins can be redeemed for fabulous gifts.