Sometimes companies find it desirable to include a convertibility option to sell bonds at a reasonable interest rate. Siemens AG, the huge German electronics company, issued €2.5 billion of convertible bonds some years ago with a coupon rate of 1.375%, which is less interest than Siemens would have paid if the bonds were not convertible. Each €1,000 bond is convertible into 17.8 common shares of Siemens stock.
In 2011, Siemens had revenues of more than €74 billion and a net income of over €6.3 billion.
The company pays dividends of €3.00 per share.
1. Compute the annual interest received by the holders of the convertible bonds.
2. The current price of one share of Siemens common stock in June 2012 was €65.70. If you held some of the Siemens convertible bonds, would you immediately convert your bonds to common stock? Why or why not?
3. Suppose the maturity date of the convertible bonds was rapidly approaching. Would you convert your holdings of the convertible bonds if the price of Siemens stock were only €62 per share? If the price were €50 per share? Explain.