A 7% annual coupon 10-year convertible bond has a par value of $1,000. Comparable bonds yield 8.5%.

Business & Finance
Tutor: None Selected Time limit: 1 Day

A 7% annual coupon 10-year convertible bond has a par value of $1,000.  Comparable bonds yield 8.5%. The current price of the issuing company's stock is $19 and the conversion ratio is 50 shares.  Valued as a bond, what price would you expect to pay for this convertible bond?

Aug 21st, 2015

Thank you for the opportunity to help you with your question!

convertible bonds, or converts, give the holder the option to exchange the bond for a predetermined number of shares in the issuing company. When first issued, they act just like regular corporate bonds, albeit with a slightly lower interest rate. Because convertibles can be changed into stock and thus benefit from a rise in the price of the underlying stock, companies offer lower yields on convertibles. If the stock performs poorly there is no conversion and an investor is stuck with the bond's sub-par return (below what a non-convertible corporate bond would get). As always, there is a trade-off between risk and return.

rate=7%

time=10yrs

par value=$1000

(8.5/100) x 1000=$85

The conversion ratio (also called the conversion premium) determines how many shares can be converted from each bond. This can be expressed as a ratio or as the conversion price, and is specified in the indenture along with other provisions.

=(7/100)x10x1000
=$700

Please let me know if you need any clarification. I'm always happy to answer your questions.
Aug 21st, 2015

Thank you for your help. There was also another question if possible 

A coupon bond which pays interest semiannually, has a par value of $1,000, matures in 5 years and has a yield to maturity of 9%.  If the coupon rate is 13%, then what should the price of the bond be?

Aug 21st, 2015

sorry for the late response, I was away on a trip. The question you have asked I can answer. Let me work it out and give you the answer.

Aug 21st, 2015

Did you know? You can earn $20 for every friend you invite to Studypool!
Click here to
Refer a Friend
...
Aug 21st, 2015
...
Aug 21st, 2015
Feb 26th, 2017
check_circle
Mark as Final Answer
check_circle
Unmark as Final Answer
check_circle
Final Answer

Secure Information

Content will be erased after question is completed.

check_circle
Final Answer