Given the following information concerning a convertible bond: Principal ............$1,000 Coupon ............5% Maturity ............15 years Call price

Question:

Given the following information concerning a convertible bond:

Principal ............$1,000

Coupon ............5%

Maturity ............15 years

Call price ............$1,050

Conversion price ......$37 (i.e., 27 shares)

Market price of the common stock ... $32

Market price of the bond ......$1,040

a) What is the current yield of this bond?

b) What is the value of the bond based on the market price of the common stock?

c) What is the value of the common stock based on the market price of the bond?

d) What is the premium in terms of stock that the investor pays when he or she purchases the convertible bond instead of the stock?

e) Nonconvertible bonds are selling with a yield to maturity of 7 percent. If this bond lacked the conversion feature, what would the approximate price of the bond be?

f) What is the premium in terms of debt that the investor pays when he or she purchases the convertible bond instead of a nonconvertible bond?

g) If the price of the common stock should double, would the price of the convertible bond double? Briefly explain your answer.

h) If the price of the common stock should decline by 50 percent, would the price of the convertible bond decline by the same percentage? Briefly explain your answer.

i) What is the probability that the corporation will call this bond?

j) Why are investors willing to pay the premiums mentioned in parts (d) and (f)?

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... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...