Eastern Digital Corp. has a convertible bond outstanding with a coupon rate of 9 percent and a

Question:

Eastern Digital Corp. has a convertible bond outstanding with a coupon rate of 9 percent and a maturity date of 20 years. It is rated Aa, and competitive, nonconvertible bonds of the same risk class carry a 10 percent return. The conversion ratio is 40. Currently the common stock is selling for $18.25 per share on the New York Stock Exchange.

a. What is the conversion price?

b. What is the conversion value?

c. Compute the pure bond value. (Use semiannual analysis.)

d. Draw a graph that includes the floor price and the conversion value but not the convertible bond price. For the stock price on the horizontal axis, use 10, 20, 30, 40, and 50.

e. Which will influence the bond price more—the pure bond value (floor value) or the conversion premium?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... 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...