Question

Consider a convertible bond as follows:
par value = $1,000; coupon rate = 9.5%
market price of convertible bond = $1,000
conversion ratio = 37.383
estimated straight value of bond = $510
yield to maturity of straight bond = 18.7%
Assume that the price of the common stock is $23 and that the dividend per share is $0.75 per year.
Answer the below questions.
(a) Calculate each of the following (1) conversion value, (2) market conversion price,(3)conversion premium per share, (4) conversion premium ratio, (5) premium over straight value, (6) favorable income differential per share, and (7) premium payback period.
(b) Answer the below questions if the price of the common stock increases from $23 to $46.
(1) What will be the approximate return realized from investing in the convertible bond?
(2) What would be the return realized if $23 had been invested in the common stock?
(3) Why would the return on investing in the common stock directly be higher than investing in the convertible bond?
(c) Answer the below questions if the price of the common stock declines from $23 to $8.
(1) What will be the approximate return realized from investing in the convertible bond?
(2) What would be the return realized if $23 had been invested in the common stock?
(3) Why would the return on investing in the convertible bond be higher than investing in the common stock directly?


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  • CreatedAugust 22, 2015
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