A bond with a face value of $5,000 can be exchanged for 70 shares of stock. The bond has a coupon rate of 6.5 percent which equals the market rate of interest. Assume the option premium is $50. What is the market value of the bond if the stock is selling for $68.90 a share and the bond matures in exactly one year? $4,744.84 $4,873.00 $5,000.00 $4,940.00 $5,050.00
Ans:
The price of a bond is present value of its future cash flows, discounted at yield to maturity. Market value of bond will be dependent on its YTM, market value of stock will not affect its pricing until the bond is converted into the stock.
The bond value can be obtained using the following equation:
Price= Coupon/(1+YTM)+coupon/(1+YTM)2 +…+coupon+principal/(1+YTM)n
The present value of the cash flows can be calculated:
Number of years=1
Coupon payment=$325 (at 6.5%)
Coupon rate=6.5%
Par value=$5000
The present value of bond is:
5325/(1.065)= $5000
So, the price of the bond at the end of year would be $5000.
Get Answers For Free
Most questions answered within 1 hours.