The following facts apply to a convertible bond making semiannual payments: Conversion price...............................................$38/share Coupon rate.........................................................2.6% Par value...........................................................$1,000

Question:

The following facts apply to a convertible bond making semiannual payments:

Conversion price...............................................$38/share

Coupon rate.........................................................2.6%

Par value...........................................................$1,000

Yield on nonconvertible debentures of same quality.............5%

Maturity..........................................................30 years

Market price of stock..........................................$34/share

a. What is the minimum price at which the convertible should sell?

b. What accounts for the premium of the market price of a convertible bond over the total market value of the common stock into which it can be converted?

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