Question

Rajiv Singh, a bond analyst, is analyzing a convertible bond. The characteristics of the bond and the underlying common stock follow:
CONVERTIBLE BOND AND UNDERLYING STOCK CHARACTERISTICS
Convertible Bond Characteristics
Par value .................. $1,000
Annual coupon rate (annual pay) .......... 6.5%
Conversion ratio ............... 22
Market price ................. 105% of par value
Straight value ................ 99% of par share
Underlying Stock Characteristics
Current market price ............. $40 per share
Annual cash dividend ............. $1.20 per share
a. Compute the bond’s
(1) Conversion value
(2) Market conversion price
(3) Premium payback period
b. Determine whether the value of a callable convertible bond will increase, decrease, or remain unchanged in response to each of the following changes, and justify each of your responses with one reason:
(1) An increase in stock price volatility
(2) An increase in interest rate volatility



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  • CreatedDecember 17, 2014
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