Flaherty Corp. has just issued a 30-year, callable, convertible bond with 6 percent annual coupon payments. The

Question:

Flaherty Corp. has just issued a 30-year, callable, convertible bond with 6 percent annual coupon payments. The bond has a conversion price of $130. The company’s stock is selling for $26 per share. The owner of the bond will be forced to convert if the bond’s conversion value is ever greater than or equal to $1,100. The required return on an otherwise identical non-convertible bond is 11 percent.

a. What is the minimum value of the bond?

b. If the stock price were to grow by 13 percent per year forever, how long would it take for the bond’s conversion value to exceed $1,100?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...