Question

A convertible bond has a coupon of 7.5 percent, paid semiannually, and will mature in 15 years. If the bond were not convertible, it would be priced to yield 6.5 percent. The conversion ratio on the bond is 20 and the stock is currently selling for $63 per share. What is the minimum value of this bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

First, we need to find the Value of the straight bond, for that we have to put the following values in the financial calculator:

INPUT	15x2=30	6.5/2=3.25		(7.5%/2)x1,000=37.50	1,000
TVM	N	I/Y	PV	PMT	FV
OUTPUT			-1,094.91

Hence, Value of the straight bond is $1,094.91

Value of the bond converted today = Conversion Ratio x Stock Price = 20 x $63 = $1,260

So, the minimum value of this bond will be the higher value between the straight bond and the converted bond, which is $1,260