19. Convertible bonds (S25.2) Sweeney Pies has issued a zero-coupon 10-year bond that can be converted into 10 Sweeney shares. Comparable straight bonds are yielding 8%. Sweeney stock is priced at $50 a share.

a. Suppose that you had to make a now-or-never decision on whether to convert or to stay with the bond. Which would you do?

b. If the convertible bond is priced at $550, how much are investors paying for the option to buy Sweeney shares?

c. If, after one year, the value of the conversion option is unchanged, what is the value of the convertible bond?