Question $4$

$\frac{0}{1}$ pts

A convertible bond issued by HuskerLand has par value of $$1000,$ coupon rate of $11\mathrm{.}3\%($interest paid annually$),$ maturity of $12$ years, and conversion ratio of $54.$ The market perceives that $12$ years from now the shares of HuskerLand are equally likely to be worth $$28\mathrm{.}59$ or $$48\mathrm{.}32.$ The term structure is assumed to be flat at $10\%.$ Assume that investors delay conversion until after they receive their last coupon. What should be the price of the convertible bond?

$($If your solution is $$4\mathrm{.}44$ then enter $"4\mathrm{.}44"$ as the answer. Precision is $0\mathrm{.}01\frac{+}{?}0\mathrm{.}10.)$

You Answered

Correct Answer

$1,431\mathrm{.}61$ margin of error $+1-0\mathrm{.}1$

Under each stock price scenario, calculate the FV as the higher of the par value or the conversion value.

Then under each stock price scenario, calculate the price of the bond as the present value of all the future cash flows by taking into account the correct FV$.$

Finally, the bond's price is each of these prices times the probability that they are observed. Since the probability is equal it is $\frac{1}{2}$ for each price.