Question

you are a financial analyst hired to value a new 30_year callable ,convertible bond .the bond has a 6% coupon payable annually .the conversion price is 125.the stock currently sells for 35.the stock price is expected to rise by 15% per year.the bond is callable at 1100.the required return on the bond is 10%

calculate the straight bond value

calculate the conversion value

how long would it take for the conversion value to exceed a call price

Answer 1

The minimum price of bond is the straight bond value or the conversion price., whichever is higher

The straight bondvalue is:

Straight bond value = $66(PVIFA10%,30) + $1,100/1.10³⁰ = 622.176+63.04

Straight bond value = $685.22

The conversion ratio is the par value divided by the conversion price,

so:Conversion ratio = $1,100/$125

Conversion ratio = 8.8

The conversion value is the conversion ratio times the stock price,

so:Conversion value = 8.8($35)

there fore Conversion value = $308

The minimum value for this bond is the conversion value of $685.22

and increased share price at 15% as growth rate is 15%

Answer (2) for equal to 1100 it may take

1100 = 685.22(1+.15)ⁿ

(1.15)ⁿ = 1100/685.22 = 1.605

there fore n = 2.5 years now it may take more that 2.5 years