One year has passed and Sands's common equity price has increased to $58 per share. Name the
Question:
Stephanie Podendorf is evaluating her investment alternatives in Sands Incorporated by analyzing a Sands convertible bond and Sands common equity. Characteristics of the two securities are as follows:
Characteristic Par value Coupon (annual payment) Current market price Straight bond value Conversion ratio Conversion option Dividend Expected market price in one year Convertible BondCommon Equity $1,000 6% $960 $940 25 At any time $42 per share $0 $54 per share $1,080
Step by Step Answer:
The two components are the straight bond value its value as a bond and the option val...View the full answer
Fundamentals of Investments Valuation and Management
ISBN: 978-0078115660
7th edition
Authors: Bradford Jordan, Thomas Miller
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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