Problem $16-11$

You are considering the purchase of a convertible bond issued by Bildon Enterprises, a non$-$investment$-$grade medical services firm. The issue has seven years to maturity and pays a semiannual coupon rate of $7\mathrm{.}675\%($i$.$e$.,3\mathrm{.}8375\%$ per period$).$ The issue is callable by the company at par and can be converted into $48\mathrm{.}900$ shares of Bildon common stock. The bond currently sells for $$955($relative to par value of $$1,000),$ and Bildon stock trades at $$12\mathrm{.}115$ a share.

a$.$ Calculate the current conversion value for the bond. Do not round intermediate calculations. Round your answer to the nearest cent.

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Is the conversion option embedded in this bond in the money or out of the money?

The conversion option embedded is this bond is

b$.$ Calculate the conversion parity price for Bildon stock that would make conversion of the bond profitable. Do not round intermediate calculations. Round your answer to the nearest cent.

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c$.$ Bildon does not currently pay its shareholders a dividend, having suspended these distributions six months ago. What is the payback $($i$.$e$.,$ breakeven "time$)$ for this convertible security, and how should it be interpreted? Do not round intermediate calculations. Round your answer to two decimal places.

The payback period would be years. This is $-$ Select$-$ as the bond matures in $7$ years.

d$.$ Calculate the convertible's current yield to maturity. Do not round intermediate calculations. Round your answer to two decimal places. $\%$

If a "straight" Bildon fixed$-$income issue with the same cash flows would yield $9\mathrm{.}45\%,$ calculate the net value of the combined options $($i$.$e$.,$ the issuer's call and the investor's conversion$)$ embedded in the bond. Do not round intermediate calculations. Round your answer to the nearest cent.

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