Question

(a)
Trump Limited has an outstanding issue of convertible bonds with $1,000 par value. These bonds are convertible into 50 shares of Ali’s common stock. The convertible bonds have a 10% coupon with 10-year maturity. The yield-to-maturity for a straight bond of similar risk is 8%.
i. Calculate the straight bond value of the convertible bond.

ii. What is the conversion value of the convertible bond when the market price of Trump’s common stock is $30 per share?

iii. If the market price of common stock were $18 per share, what would be the least selling price of the convertible bond?

Answer 1

1) The Bond value is

Par Value: $1000

Coupon Rate: 10%

Yield to Maturity: 8%

No Of Years: 10 years

Present Value of the Bond: 1134

No of Year	Payments	Discount rate	Present Value
1	100	1.08	92.59
2	100	1.166	85.76
3	100	1.26	79.37
4	100	1.36	73.53
5	100	1.47	68.03
6	100	1.59	62.89
7	100	1.71	58.48
8	100	1.851	54.02
9	100	2	50.00
10	100	2.16	46.30
		Total	670.97
No of Year	Principal	Discount rate	Present Value
10	1000	2.16	462.962963
Present Value			1134

2) The bond is covertible into 50 shares of the company.

If the shares are trading at $30 per share then the value of the conversion is $1500 (30 * 50)

3) The least selling price of the convertible bond is $20 (Par value of the bond / No of convertible options). Its the least that a bond can be converted into as below this the bond holders will face a loss on their investments