Question

Determining values - convertible bond ​Craig's Cake Company has an outstanding issue of 20​-year convertible bonds with a ​$1,000 par value. These bonds are convertible into 60 shares of common stock. They have a 13​% annual coupon interest​ rate, whereas the interest rate on straight bonds of similar risk is 16​%.

a. Calculate the straight bond value of this bond. (ANSWER: $822.13)

b. Calculate the conversion​ (or stock) value of the bond when the market price is ​$11 per share of common stock.

c. What is the minimum market value of the​ bond?

Answer 1

a

K = N

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

k=1

K =20

Bond Price =∑ [(13*1000/100)/(1 + 16/100)^k]     +   1000/(1 + 16/100)^20

k=1

Bond Price = 822,13

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

PMT = Par value * coupon %=1000*13/(100)

I/Y =16

N =20

FV =1000

CPT PV

Using Excel

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

=PV(16/(100),20,-13*1000/(100),-1000,)

b

Conversion value = Conversion ratio*current share price

Conversion value = 60*11

Conversion value = 660

c

Minimum market value = min of conversion value and straight value = min(660,822.13) = 660