27 Convertible Bonds Trichet SA has just issued a 30-year callable, convertible bond with a coupon rate
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27 Convertible Bonds Trichet SA has just issued a 30-year callable, convertible bond with a coupon rate of 7 per cent annual coupon payments. The bond has a conversion price of €125. The company’s equity is selling for €32 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 12 per cent.
(a) What is the minimum value of the bond?
(b) If the share price were to grow by 15 per cent per year for ever, how long would it take for the bond’s conversion value to exceed €1,100?
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