Question

In: Accounting

You own a convertible bond that has a 6% yield, 4.5% coupon rate, pays semiannually, and...

You own a convertible bond that has a 6% yield, 4.5% coupon rate, pays semiannually, and has 3 years to maturity. The conversion rate is 8. The current stock price is 127.3. Calculate your gain or loss if you decide to convert. Answer is 59.03 Please show steps. - no excel

Solutions

Expert Solution

Step 1 First we will calculate the present value of bonds

Step 2 Then calculate value of 8 shares to be received

Step 3 Then the difference of above two to know gain or loss

Step 1

Face Value of Bond = $1000

we will discount future inflow of interest and maturity value @ 3% ( half of 6% yield)

Period for Interest = 6 ( double of 3 years as interest is semiannually)

Interest per period = 1/2 of 4.5 % of $1000 = $22.50 per period

PV factor at 3% for 6 period = 5.41719

PV factor at 3% for 6th period = 0.83748

Time Period Amount PV factor @ 3% Present Value
Interest 1 to 6 22.5 5.41719 121.886775
Maturity Value 6 1000 0.83748 837.48
Present Value of Bond 959.366775

Value of bond = $959.37 rounded off to two decimals

Step 2

Value of Shares to be received on conversion = 8 x $127.30 = $1018.40

Step 3

Gain on conversion = $1018.40-$959.37

=$59.03

Hope you understands the steps

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