Question: Suppose Microsoft is considering a convertible bond ($1,000 par value, maturing in 10 years). Goldman Sachs suggests the bond agreement be structured as follows: A

Suppose Microsoft is considering a convertible bond ($1,000 par value, maturing in 10 years). Goldman Sachs suggests the bond agreement be structured as follows: A certain 8% annual coupon rate convertible bond ($1,000 par value, maturing in 10 years) is convertible at the holders option into 3 shares of Microsoft common stock. The bond is currently trading at $900. The stock pays an annual dividend of $1.00 a share and is priced around $200 a share. The investment yield is 15%. Please compute the following:

What is the bonds conversion price?
What is its conversion ratio?
What is the conversion premium, in dollars and as a percentage?
If comparably rated nonconvertible bonds sell to yield 15%, what is the investment value of the

convertible?
Would you invest in this bond, given the terms?

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