Given the information below, answer the following questions. A convertible bond has the following features: Principal $1,000

Question:

Given the information below, answer the following questions.

A convertible bond has the following features:

Principal $1,000 Maturity date 15 years Interest $35 (3.5% coupon)

Call price $1,035 Exercise price $40 a share The company’s stock pays a cash dividend of $0.20, and the stock is selling for $30.

Nonconvertible bonds issued by the company yield 6 percent, and this bond is selling for $950.

a) What is the value of the bond in terms of stock?

b) What is the premium over the bond’s value as stock?

c) What is the premium over the bond’s value as debt?

d) If the price of the stock declined to $15, what is the minimum price the bond will command?

e) What is the income advantage of the bond relative to the stock?

f) Would you expect the bond to sell for its value as debt if the price of the stock doubled to $60 a share?

g) What is the range of stock prices that virtually assures the investor that the bond will not be called?

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