eBook

Chapter 12 Financial Planning Exercise 17 Calculate current yield, conversion ratio, and yield to maturity

A 7% convertible bond (maturing in 25 years) is convertible into 25 shares of the company's common stock. The bond has a par value of $1,000 and is currently trading at $700; the stock (which pays a dividend of 52 cents a share) is currently trading in the market at $47 a share. Use annual compounding of interest. Use this information to answer these questions.

1. What is the current yield on the convertible bond? Round your answer to two decimal places.

   %

   What is the dividend yield on the company's common stock? Round your answer to two decimal places.

   %

   Which provides more current income: the convertible bond or the common stock?

   -Select-Convertible bondCommon stockItem 3

2. What is the bond's conversion ratio?

3. What is the conversion value of this issue? Round your answer to the nearest dollar.

   $ Is there any conversion premium in this issue?

   -Select-PremiumDiscountNoneItem 6

   If so, how much? Round your answer to the nearest dollar. (Enter zero, if the answer to previous question is "None". Enter both premium and discount, if any, as a positive value.)

   $

4. What is the (approximate) yield to maturity on the convertible bond? Round your answer to two decimal places.

   %