Question

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

$

Answer 1

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.