Question

Eastern Digital Corp has a convertible bond outstanding with a coupon rate of 9% and a maturity date of 20 years. The market rate of interest on bonds of the same risk class carry a 10% return. The conversion ratio is 40. The company’s common stock is selling for $18.25 per share. The bond is selling for $970.

What is the conversion value?

What is the conversion premium?

Answer 1

COnversion Value = No. of shares in conversion * Share Price

= 40 * 18.25

= $ 730

Conversion Premium:

The fair Value of Bond:

Year	CF	PVF @10%	Disc CF
1	$        90.00	0.909091	$    81.82
2	$        90.00	0.826446	$    74.38
3	$        90.00	0.751315	$    67.62
4	$        90.00	0.683013	$    61.47
5	$        90.00	0.620921	$    55.88
6	$        90.00	0.564474	$    50.80
7	$        90.00	0.513158	$    46.18
8	$        90.00	0.466507	$    41.99
9	$        90.00	0.424098	$    38.17
10	$        90.00	0.385543	$    34.70
11	$        90.00	0.350494	$    31.54
12	$        90.00	0.318631	$    28.68
13	$        90.00	0.289664	$    26.07
14	$        90.00	0.263331	$    23.70
15	$        90.00	0.239392	$    21.55
16	$        90.00	0.217629	$    19.59
17	$        90.00	0.197845	$    17.81
18	$        90.00	0.179859	$    16.19
19	$        90.00	0.163508	$    14.72
20	$        90.00	0.148644	$    13.38
20	$ 1,000.00	0.148644	$ 148.64
Value of Bond			$ 914.86

Actual Price of Bond = $970

COnversion premium = Current selling price - Fair Price

= $ 970 - $ 914.86

= $ 55.14