The following information concerns a convertible bond: Coupon ..........6% ($60 per $1,000 bond) Exercise price .........$25 Maturity
Question:
The following information concerns a convertible bond:
Coupon ..........6% ($60 per $1,000 bond)
Exercise price .........$25
Maturity ..........20 years
Call price ..........$1,040
Price of the common stock ...$30
a) If this bond were nonconvertible, what would be its approximate value if comparable interest rates were 12 percent?
b) Into how many shares can the bond be converted?
c) What is the value of the bond in terms of stock?
d) What is the current minimum price that the bond will command?
e) If the current market price of the bond is $976, what should you do?
f) Is there any reason to anticipate that the firm will call the bond?
g) What do investors receive if they do not convert the bond when it is called?
h) If the bond were called, would it be advantageous to convert?
i) If interest rates rise, would that affect the bond’s current yield?
j) If the stock price were $10, would your answer to part (i) be different?
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...
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