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?

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

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