Question

A certain 7?% annual coupon rate convertible bond? (maturing in 20? years) is convertible at the? holder's option into 23 shares of common stock. The bond is currently trading at ?$820. The stock? (which pays 92?¢ a share in annual? dividends) is currently priced in the market at $35.87a share.

**a.??**What is the? bond's conversion? price?

**b.??**What is its conversion? ratio?

**c.??**What is the conversion value of this?
issue? What is its conversion? parity?

**d.??**What is the conversion? premium, in dollars
and as a? percentage?

**e.??**What is the? bond's payback? period?

**f.?**If comparably? rated, nonconvertible bonds
sell to yield 9 % what is the investment value of the?
convertible?

**a. T**he? bond's conversion price is
-$---------?? (Round to the nearest? cent.)

**b.?**The conversion ratio is ---------------
shares. ?(Round to the nearest? integer.)

**c.?**The conversion value of this issue is
---------------?$ (Round to the nearest? cent.)

The conversion parity of this issue is ----------------?$.?(Round to the nearest? cent.)

**d.?**The conversion premium in dollars is
?$---------- (Round to the nearest? cent.)

The conversion premium as a percentage is ------------?%. ?(Round to two decimal? places.)

**e.?**The? bond's payback period is
-------------years. (Round to one decimal? place.)

**f.?**The investment value of the convertible is
---------------?$? (Round to the nearest? cent.)

Answer #1

a) Conversion Price = $820.00

b) Conversion Ratio = 23

c) Conversion Value = 23 x 35.87 = $825.01

Conversion Parity = Bond Price / Ratio = 820 / 23 = $35.65

d) Conversion Premium = 820 - 825.01 = -5.01

As a percentage = -5.01 / 820 = -0.61%

e) Payback Period = Premium / (1 + Premium) / (Current Yield - Dividend Yield)

= -5.01 / (1 - 5.01) / (70/820 - 0.92/35.87) = 20.9 years

f) Investment Value is the value of the bond without convertible option, which can be calculated using PV function

I/Y = 9%, PMT = 70, FV = 1000, N = 20 => Compute PV = $817.43

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