Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds

Question:

Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10% annual coupon interest rate and a 20-year maturity. The interest rate on a straight bond of similar risk is currently 12%.

a. Calculate the straight bond value of the bond.

b. Calculate the conversion (or stock) value of the bond when the market price of the common stock is $15, $20, $23, $30, and $45 per share.

c. For each of the stock prices given in part b, at what price would you expect the bond to sell? Why?

d. What is the least you would expect the bond to sell for, regardless of the common stock price behavior?

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...