You are considering purchasing a convertible bond issued by Company X today.It has a face value of
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Question:
You are considering purchasing a convertible bond issued by Company X today.It has a face value of $1,000, 2 years in maturity, and 10% coupon rate.It can be converted into 20 shares (a conversion ratio of 20) of the Company's stock.Assuming that the current stock price is $50, but could go up and down by factors of u=1.10 or d=0.9091 with the same probability of 50% each. If yields are expected to remain at the current yield of 6% for the next 2 years.How much should you pay for it?
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