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In 2010, UBS Bhd. issued RM500 million of 4.5% senior unsecured six-year convertible bonds. The bonds...

In 2010, UBS Bhd. issued RM500 million of 4.5% senior unsecured six-year convertible bonds. The bonds were issued at the face value of RM1,000 per bond. The conversion price is RM38.75 per share, in which is a premium of 35% to the recent stock price.

Required:

(i) Suppose that the yield on bond is 5.5% and the bondholders can redeem the bond at a premium of 10% to their nominal value upon maturity, analyse the floor value of bond.

(ii) Analyse whether the bondholders should convert the bonds, given that the share price of UBS in 2016 is RM45.

Analyse also the additional shares will UBS need to issue if the bondholders do convert the bonds.

Solutions

Expert Solution

(i) Face value                       1,000
Number of Bonds                  500,000 (500000000/1000)
Annual Coupon payment per bond                             45 (0.045*1000)
Number of years                               6
Terminal payment on maturity per bond                       1,100 (1.1*1000)
Market yield 5.50%
Present Value (PV) of future cash flow at market yield of 5.5%                 1,022.57 (Using PV function of excel with Rate=5.5%,Nper=6, Pmt=-45, FV=-1100)
Floor Value of Bond                 1,022.57 RM
Total Bond Amount    511,284,640.11 (500000*1022.57)
(ii) Share Price 45
Conversion price 38.75
Number of shares received per bond 25.80645161 (1000/38.75)
Market price of the shares received per Bond 1161.290323 (45*25.80645161)
This amount is higher than the terminal cash flow of $1100 at maturity
BONDHOLDERS SHOULD CONVERT THE BONDS
Additional shares need to be issued for conversion            12,903,226 (500000*25.80645161)


jeff jeffy answered 2 years ago
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