(a) Discuss the factors which determine the market price of convertible bonds.

(b) Marlowe plc has in issue bonds which are convertible in three years’ time into 25 ordinary shares per bond. If not converted, they will be redeemed in six years’

time at par. The bond pays interest of 9 per cent per year and has a current market price of £90.01. Marlowe’s current share price is £3.24. If holders of ordinary bonds of a similar risk class require a return of 13 per cent per annum, calculate:

(i) the minimum expected annual growth in Marlowe’s share price that would be needed to ensure that conversion takes place in three years’ time;

(ii) the implicit conversion premium.