A 9.35%, 18-year convertible bond is selling at $1,095. The bond has a conversion rate of...

A 9.35%, 18-year convertible bond is selling at $1,095. The bond has a conversion rate of 38. The common stock is trading at 23.12. Comparable straight bonds are selling to yield 9 %. The common stock pays an annual dividend of .50 cents per share.
1. Calculate the bond’s conversion value
2. Premium (if any) over conversion value
3. Investment value
4. And premium (if any) over investment value, and payback period.

Expert Solution

Answer:

a) Bond's conversion value = Conversion ratio * Market price of the stock
i.e.Bond's conversion value = 38 * 23.12 = $878.56

b) Premium over conversion = Market conversion price - Market price of the stock
i.e.Premium over conversion = (1095/38) - 23.12 = 28.82 - 23.12 = $5.70

c) Investment value (straight value of bond) = coupon rate PVAF (9%, 18) + redemption value PVIF (9%, 18)
= 93.50 PVAF(9%,18) + 1000 PVIF (9%,18) = 818.65 + 211.99 = $1030.64

d) Premium over investment value = Market Price of debenture - Investment Value = $(1095-1030.64) = $64.36
OR (64.36/1030.64)*100 = 6.24%

Favourable income differential per share = [Coupon interest - (Conversion ratio * dividend per share)] / Conversion ratio
Favourable income differential per share = [93.50 - (38*0.50)] / 38 = 1.96

Therefore, premium payback period = Conversion premium / Favourable income differential per share
i.e. premium payback period = 5.70 / 1.96 = 2.91 years

jeff jeffy answered 1 year ago

A 10.25%, 14-year convertible bond has a conversion rate of 19 and is selling at a...

A 10.25%, 14-year convertible bond has a conversion rate of 19 and is selling at a quote of 98.40. The common stock is selling at $35 and comparable non-convertible bonds are yielding 13%. The common stock pays an annual dividend of $1.50 per share. A. Calculate the conversion value of the bond B. Calculate the conversion premium (if any) C. Calculate the investment value of the bond D. Calculate the investment premium (if any) E. Calculate the payback period

A convertible bond issue has a conversion premium of $50 at a time when the underlying...

A convertible bond issue has a conversion premium of $50 at a time when the underlying share’s price is $35. The convertible has a par value of $1,000 and is convertible into 80 shares of the issuer’s stock. The convertible bond’s price is closest to : A. $1,050.B. $2,750.C. $2,850.

Sean Thornton has invested in a convertible bond issued by Cohn Enterprises The conversion ratio is...

Sean Thornton has invested in a convertible bond issued by Cohn Enterprises The conversion ratio is 20. The market price of Cohan common stock I $60 per share. The face value is $1000. The coupon rate is 8 percent and the annual interest is paid until the maturity date 10 years from now. similar nonconvertible bonds are yielding 12 percent (YTM) in the marketplace. a.)Calculate the straight bond value of this bond. b.) Calculate the conversion value of the Cohan...

A ten year $1,000 bond has a 10% coupon rate convertible semiannually. It is callable at...

A ten year $1,000 bond has a 10% coupon rate convertible semiannually. It is callable at any time after a two-year lockout period. An investor wishes to buy the bond to yield at least 8% convertible semiannually. What is the price which will yield at least 8% convertible semiannually?? Please show work and steps without excel or financial calculator

Campbell, Inc., has a $1,000 face value convertible bond issue that is currently selling in the...

Campbell, Inc., has a $1,000 face value convertible bond issue that is currently selling in the market for $990. Each bond is exchangeable at any time for 24 shares of the company’s stock. The convertible bond has a 6.9 percent coupon, payable semiannually. Similar nonconvertible bonds are priced to yield 9 percent. The bond matures in 10 years. Stock in the company sells for $40 per share. a-1. What is the conversion ratio? a-2. What is the conversion price?...

The following facts apply to a convertible bond making semiannual payments: Conversion price $ 47...

The following facts apply to a convertible bond making semiannual payments: Conversion price $ 47 /share Coupon rate 8.4 % Par value $ 1,000 Yield on nonconvertible debentures of same quality 9 % Maturity 20 years Market price of stock $ 46 /share What is the minimum price at which the convertible should sell? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

A(n) 99% convertible bond carries a par value of $1,000 and a conversion ratio of 21....

A(n) 99% convertible bond carries a par value of $1,000 and a conversion ratio of 21. Assume that an investor has $5,000 to invest and that the convertible sells at a price of $1,000 (which includes a 26% conversion premium). How much total income (coupon plus capital gains) will this investment offer if, over the course of the next 12 months, the price of the stock moves to $87.58 per share and the convertible trades at a price that includes...

Eastern Digital Corp has a convertible bond outstanding with a coupon rate of 9% and a...

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?

The interest rate on a one-year bond selling today is 3% and the interest rate on...

The interest rate on a one-year bond selling today is 3% and the interest rate on a two-year bond selling today is 4%. According to expectations theory people expect the interest rate on a one-year bond selling one year from today to be about

Convertible bond vs straight fixed-rate bond. Which bond has a higher demand, higher risk, and price...

Convertible bond vs straight fixed-rate bond. Which bond has a higher demand, higher risk, and price ceteris paribus.

Question