A 6 percent convertible bond (maturing in 20 years) is convertible into 25 shares of the companys

Question:

A 6 percent convertible bond (maturing in 20 years) is convertible into 25 shares of the company’s common stock. The bond has a par value of $1,000 and is currently trading at $800; the stock (which pays a dividend of 95 cents a share) is currently trading in the market at $35 a share. Use this information to answer the following questions:

a. What is the current yield on the convertible bond? What is the dividend yield on the company’s common stock? Which provides more current income: the convertible bond or the common stock? Explain.

b. What is the bond’s conversion ratio? Its conversion price?

c. What is the conversion value of this issue? Is there any conversion premium in this issue? If so, how much?

d. What is the (approximate) yield to maturity on the convertible bond?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...