Question

Lynde Corporation common stock currently sells for $28, and its 9 years maturity convertible bond with 14% annual coupon rate paid semi-annually has a yield to maturity of 12%. Each bond can be converted into 37 shares of common stock at any time before maturity. What is the conversion value of the bond and would bondholders convert their bond into stock today? You need to provide calculations to support your answer.

Answer 1

  

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Conversion Value = No of shares 8 Value per share

= 37 * 28

= 1036

Value of Bond =  

Where r is the discounting rate of a compounding period i.e. 12% / 2 = 0.06

And n is the no of Compounding periods 9 years * 2 = 18

Coupon 14% / 2 = 0.07* 1000 = 70

=

= 1108.28

Since the value of BOnd is more than the conversion value, they should not convert.

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