Question

IMGA, an asset management firm, owns a convertible bond that matures in 16 years. The bond is issued by Malmondier Investments and has a coupon rate of 6 percent paid semi-annually, a face value of $1,000 and a conversion price of $25. Similar bonds have a current market return of 5.85 percent. The current price of Malmondier Investments stock is $26.50 per share.

What is the bond value?

Answer 1

Conversion price = Bond par value/conversion ratio

25 = 1000/Conversion ratio

Conversion ratio = 40

Conversion value = Conversion ratio*current share price

Conversion value = 40*26.5

Conversion value = 1060

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =16x2

Bond Price =∑ [(6*1000/200)/(1 + 5.85/200)^k]     +   1000/(1 + 5.85/200)^16x2

k=1

Bond Price = 1015.45 = value of straight bond

Using Calculator: press buttons "2ND"+"FV" then assign

PMT = Par value * coupon %/coupons per year=1000*6/(2*100)

I/Y =5.85/2

N =16*2

FV =1000

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(5.85/(2*100),2*16,-6*1000/(2*100),-1000,)

Value of conv bond = max (conversion value. value of straight bond)

=max(1060,1015.45 ) = 1060