Question
In: Accounting
A 3% callable and convertible corporate bond with a face value of $1,000 and 20 years...
A 3% callable and convertible corporate bond with a face value of $1,000 and 20 years remaining to maturity trades to yield 0.5%. Its conversion ratio is 40. The market value of bond is equal to 104% of the conversion value. The issuer just announced the bond would be called at 110 and simultaneously the market value of the underlying stock increased by 3%. Find the new market value of the bond following the announcement and express it in dollars and cents. If the bond had a call price of 150%, what would its market value be then?
Solutions
Expert Solution
| Face value | $ 1,000 |
| Conversion ratio | 40% |
| Market value of bond | 104% of the conversion price |
| Bond would be called | $ 1,100 |
| Market value of Stock =110/104% | $ 1,058 |
| Stock price increase | 3% |
| New Market value of the stock | 1,089.42 |
| New Market value of the Bond | $ 1,133.00 |
| New Market value of the Bond | $ 1133 and 0 cents |
| If the bond had a call price of 150% then the following is the Maket value | |
| Face value | $ 1,000 |
| Conversion ratio | 40% |
| Market value of bond | 104% of the conversion price |
| Bond would be called | $ 1,500 |
| Market value of Stock =110/104% | $ 1,442 |
| Stock price increase | 3% |
| New Market value of the stock | 1,485.58 |
| New Market value of the Bond | $ 1,545.00 |
| New Market value of the Bond | $1,545 |
| New Market value of the Bond | $ 1545 and 0 cents |
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