Question

Characteristics of Tanbs, Inc., convertible bonds.

Conversion Rati0	25.885
Face Value	$1,000
Maturity Date	15 years hence
Coupon Interest Rate	6.75% annual
Interest Paid	semiannually
Calculate Tanbs, Icn.'s straight bond value on it's convertible bonds. The current market interest rate on similar nonconvertible bonds is 8%.

Answer 1

Face Value = $1000

Maturity = 15years

Coupon Interest Rate = 6.75% (paid semi-annually)

So Coupon Interest = $1000*6.75% = $67.5 (full year), so semi-annually the interest paid will be $33.75

The rate of interest in the market or the yield to maturity for the non-convertible bond is 8% (full year), but half yearly it is 4%

So Price of the bond = Coupon Interest* pvifa (ytm%, n*2 years) + Face Value of the bond * pvif (ytm%, n*2years)

Or, Price of the bond = $33.75* pvifa (4%, 30) + $1000* pvif (4%, 30)

Or, Price of the bond = $33.75* 17.292 + $1000*0.3083= $891.905

Again conversion ratio indicates that during the time of conversion for one share 25.885 convertible security must be there. Now if the price of the convertible bond is $891.905 then the total value of the convertible bonds would be ($891.905*25.885) = $23087 (approx)