You plan to invest 11,000 and are considering a convertible bond issued by France Telecom SA with
Question:
You plan to invest €11,000 and are considering a convertible bond issued by France Telecom SA with a par value of €1,000 and convertible into Orange SA shares with a conversion ratio of 20. This convertible bond pays a coupon of 2.5% and sells at a price of €1,100 (which includes a 15% conversion premium). How much total income(coupon plus capital gains) will this investment offer if, over the course of the next 12 months, the price of the stock moves to €80 per share and the convertible trades at a price that includes a conversion premium of 5%? What is the holding period return on this investment? Finally, calculate the current price of the underlying Orange SA common stock.
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Calculations Total income Coupon payment Capita...View the full answer
Fundamentals Of Investing
ISBN: 9780135175217
14th Edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk
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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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