Question

Seinfeld Co. issued a 20 year, 7% coupon, convertible bond. The annual yield is 9% and the bond is convertible to 25 shares of Seinfeld common stock which currently sells for $45. A. What is the price of the bond? B. If the bond is also callable in one month at par (face) what should bondholders do?

Answer 1

Bond face value be considered as $1000

Annual coupon payment = 1000 * 7% = $70

(a) Price of bond = PV of coupon + PV of maturity amount

= 70 * PVFA (9%, 20) + 1000 * PVF(9%, 20)

= 70 * 9.1285 + 1000 * 0.1784

= $ 863.07

(b) Bond callable value = $1000 (par value)

Conversion value = No. of shares * Market price

= 25 * $45

= $1,125

Bondholders receive a greater value in case of conversion of bonds into equity shares, hence conversion option should be preferred.