Question

# You have been hired to value a new 20-year callable, convertible bond. The bond has a...

 You have been hired to value a new 20-year callable, convertible bond. The bond has a coupon rate of 8.4 percent, payable semiannually, and its face value is \$1,000. The conversion price is \$67, and the stock currently sells for \$54.
 a. What is the minimum value of the bond? Comparable nonconvertible bonds are priced to yield 9 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.)

á). Conversion Ratio = Par Value / Conversion Price = \$1,000 / \$67 = 14.93

Conversion Value = Stock Price x Conversion Ratio = \$54 x 14.93 = \$805.97

Straight Bond Value = \$42[PVIFA4.5%,40] + \$1,000/1.04540 = \$772.87 + \$171.93 = \$944.80

The minimum bond price is the greater of the straight bond value or the conversion value, which is conversion value of \$805.97

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

= [\$54 - \$67] / \$54 = -\$13 / \$54 = -0.24.07, or 24.07%