Question

20. On January 1, 2020, Amazing Co. (AMZ) issued $1 billion of 3% coupon (paid annually) convertible bonds due on January 1, 2025 (5 Year Maturity). These could be converted into 4.5 shares of common stock, and each bond sold at a par value of $1000. At the time of the issue, the price of the AMZ stock was $200, and it had 1 billion shares outstanding. AMZ had a debt rating of A, and the yield on A-rated non-convertible bonds was 6%. What was the value of the conversion option per bond?

A. $ 30.00 B. $ 60.75 C. $ 126.37 D. $ 100.00

Answer 1

Year	YTM factor	Discount factor@6%
1	1.06	0.94
2	1.06	0.89
3	1.06	0.84
4	1.06	0.79
5	1.06	0.75
	Total	4.21
	Value of conversion option per Bond=		Coupon amount*PVAF(i,n)
		=	30*PVAF(6%,5)
		=	30*4.21
		=	$126.37
So the correct answer is option C i.e. $126.37