Manpower Electric Company has 6 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 20, the stock price $36, and the bonds mature in 16 years.
a. What is the conversion value of the bond?
b. Assume after one year that the common stock price falls to $30.50. What is the conversion value of the bond?
c. Also assume that after one year interest rates go up to 10 percent on similar bonds. There are 15 years left to maturity. What is the pure value of the bond? Use semiannual analysis.
d. Will the conversion value of the bond (part b) or the pure value of the bond (part c) have a stronger influence on its price in the market?
e. If the bond trades in the market at its pure bond value, what would be the conversion premium (stated as a percentage of the conversion value)?