Question

A convertible bond has the following terms:  Principal of $1000, coupon interest of 7%, maturity in 10 years, callable after five years at 1070.  The conversion price is $40 (25 shares).  The current price of the common stock is $41.  Similar risk bonds have a yield to maturity of 8%.  Would it make sense to convert the bond today, not convert it, or wait a while to decide whether to convert? Why (you should use some numbers in your answer)?

I need help solving this problem.

Answer 1

Here the bonds are value of 1000 each with 7percntage coupon rate .

Maturity was at 10 years and callable value after 5 year is 1070.

The best decision is not to convert the bonds into shares .

The interest rate is good and similar bonds having risk of 8 % but this bonds give 7% return and there is a change in the callable value by 70 after 5 years.

The share does not have a fixed return and we cannot expect definite return on the shares but we can expect the return in bonds.

There is no security for the amount invested in the share but there is security for the amount invested in the bonds .

There is a option to the investor if at all the investor is interested in the shared of the company then they may convert the bonds at 9th year into shares to get maximum benefits.

All the above mentioned points are on the view of finance if investors have any personal opinion from other view other than finance view then they can convert the slbonds in to shares at any time .

These are all the information required to solve the given situation.

I hope, all the above mentioned points and explanations are useful and helpful to you.

Thank you.