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A certain 6​% annual coupon rate convertible bond​ (maturing in 20​ years) is convertible at the​...

A certain 6​% annual coupon rate convertible bond​ (maturing in 20​ years) is convertible at the​ holder's option into 20 shares of common stock. The bond is currently trading at ​$800. The stock​ (which pays 81​¢ a share in annual​ dividends) is currently priced in the market at ​$33.18 a share. a. What is the​ bond's conversion​ price? b. What is its conversion​ ratio? c. What is the conversion value of this​ issue? What is its conversion​ parity? d. What is the conversion​ premium, in dollars and as a​ percentage? e. What is the​ bond's payback​ period? f. If comparably​ rated, nonconvertible bonds sell to yield 8 % comma what is the investment value of the​ convertible?

Solutions

Expert Solution

A. what is bond conversion price?

Bond current price/ Number of common stock = 800/20 = $40

b. What is its conversion price?

Bond current price/Bond’s conversion price = $800/$40 = 20

C. what is the conversion value of this issue? What is the conversion parity?

Conversion value = Conversion ratio X Current market price of the stock

                                = 20 x 35 = $700

Conversion parity = Convertible bond price/ Number of common stock

                                  = 800/20 = $40

D. what is the conversion premium in dollars and as a percentage?

Conversion premium = Bond current price – Conversion value = $800- $700 = $100

Conversion premium in % = Conversion premium/Conversion value = $100/$700 = 14.29%

jeff jeffy answered 1 year ago
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