Question: Consider a 1 year reverse convertible bond issued by sumsung. The coupon rate is 20% (only pay once a year) and face value is 100,000

Consider a 1 year reverse convertible bond issued by sumsung. The coupon rate is 20% (only pay once a year) and face value is 100,000 USD . At the maturity date, the firm has the option to convert it to 1000 shares of sumsung stock.

1. Suppose at the maturity date, the sumsung stock price is 167 USD. What is debtholders payoff?

2. Explain why the reverse convertible bond promises high coupon rate

3. Should the coupon rate be higher/lower when the underlying firm stock is more volatile?

4. Suppose at the maturity date, the sumsung stock price is 79 USD. What is debtholders payoff?

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