Calculate the following: a. The current market conversion price for the Sands convertible bond. b. The expected
Question:
a. The current market conversion price for the Sands convertible bond.
b. The expected one-year rate of return for the Sands convertible bond.
c. The expected one-year rate of return for the Sands common equity.
Common Equity Characteristic Convertible Bond $1,000 Par value Coupon (annual payment) 6% Current market price $960 $42 per share $940 Straight bond value Conversion ratio 25 Conversion option At any time $0 Dividend Expected market price in one year $1,080 $54 per share
Step by Step Answer:
Conversion price 960 25 ...View the full answer
Fundamentals of Investments, Valuation and Management
ISBN: 978-1259720697
8th edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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