Rajiv Singh, a bond analyst, is analyzing a convertible bond. The characteristics of the bond and the

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

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... 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...