In: Accounting
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
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
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