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. Masco is issuing new 15-year convertible bonds that can be exchanged for 40 shares of...

. Masco is issuing new 15-year convertible bonds that can be exchanged for 40 shares of stock. The current stock price is 23. If not for the convertibility feature, the bonds would carry a 9% interest rate. However, with the convertibility feature attached the bonds will pay a 7% annual coupon and can still be issued at the par value of $1,000. What is the value of the conversion premium?

a) $20             b) $80              c) $160            d) $210       

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Answer #1
                  K = N
Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =15
Bond Price =∑ [(7*1000/100)/(1 + 9/100)^k]     +   1000/(1 + 9/100)^15
                   k=1
Bond Price = 838.79

Value of share upon exercise of convertible option=

40*23 = 920

Value of convertibility feature = Value of share upon exercise of convertible option-bond price

=920-838.79 =~ 80

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