Question

NHT, Inc. has $300 million of Baa-rated convertible bonds outstanding. The bonds have a 6.5% coupon rate, with coupons paid semiannually, and six years remaining to maturity. These bonds are currently trading at 122.5% of face value. If Baa-rated non-convertible bonds with six years remaining to maturity are currently priced to yield 4.6%, decompose NHT’s convertible bonds into their debt and equity components.

Answer 1

Computation of Price of Non Convertible Bond:

Price = Semi Annual Coupon * PVAF(0.023,12) + Maturity * PVAF(0.023,12)

Price = 300 Million * 6.50%/2 * 10.3831 + 300 Million * 0.7612

Price = $9.75 Million * 10.3831 + 300 Million * 0.7612

Price = $329.59 Million

Debt Component in Convertible Bond = $329.59 Million

Equity Component in Convertible Bond = Face Value * Issue Price - Debt Component

Equity Component in Convertible Bond = $300 Million * 122.50% - $329.59 Million

Equity Component in Convertible Bond = $367.50 Million - $329.59 Million

Equity Component in Convertible Bond = $37.91 Million

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