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# Problem 24-11 Calculating Values for Convertibles [LO6] You have been hired to value a new 20-year...

Problem 24-11 Calculating Values for Convertibles [LO6]

 You have been hired to value a new 20-year callable, convertible bond. The bond has a coupon rate of 2.8 percent, payable semiannually, and its face value is \$1,000. The conversion price is \$59, and the stock currently sells for \$46.
 a. What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 3 percent. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the conversion premium for this bond? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 a. Minimum value of the bond b. Conversion premium %

#### Homework Answers

Answer #1

a). The minimum bond price is the greater of the straight bond value or the conversion value. The straight bond value is:

 INPUT 20*2=40 3/2=1.5 (2.8%/2)*1,000=14 1,000 TVM N I/Y PV PMT FV OUTPUT -970.08

Hence, Straight Bond Value = \$970.08

Conversion Ratio = Par Value / Conversion Price = \$1,000 / \$59 = 16.95

Conversion Value = Conversion Ratio x Stock Price = 16.95 x \$46 = \$779.66

The minimum value for this bond is the straight bond value of \$970.08.

b). Conversion Premium = [Conversion Price - Stock Price] / Stock Price

= [\$59 - \$46] / \$46 = 28.26%

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