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Your company needs funds for expansion and decides to issue a 5-year convertible bond. The stock...

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.

  1. How many stock call options are embedded in each $1,000 convertible bond?
    1.   25
    2.   40
    3.   50
    4.   20
  1. What is the option value for each option embedded in the convertible bond?
    1. $4.49
    2. $40
    3. $50
    4. $89.83
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