Question

Your company needs funds for expansion and decides to issue a 5-year convertible bond. The stock price currently is $40 and your banker recommends a 25% conversion premium over the current stock price. Using option models the total option value of the convertible is found to be $89.83 per $1,000 face amount of bond. The company’s current cost of regular 5-year debt is 4%, assuming semi-annual interest payments. The stock does not pay a dividend.

q. What amount of debt value needs to be embedded in the security so that the convertible bond trades at a par price of $1,000? a. $89.83 b. $10.17 c. $910.17 d. $1,000.00

. What coupon will result in the convertible bond trading at par, i.e. at a $1,000 sale price? The coupon will be paid semi-annually. a. 1.0% b. 1.7% c. 2.0% d. 4.0%

Answer 1

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