Question
1. Given the following information concerning a convertible bond: a. What is the current yield of this bond? b. What is the value of the
1. Given the following information concerning a convertible bond:
a. What is the current yield of this bond?
b. What is the value of the bond based on the market price of the common stock?
c. What is the value of the common stock based on the market price of the bond?
d. What is the premium in terms of stock that the investor pays when he or she purchases the convertible bond instead of the stock?
e. Nonconvertible bonds are selling with a yield to maturity of 7 percent. If this bond lacked the conversion feature, what would the approximate price of the bond be?
f. What is the premium in terms of debt that the investor pays when he or she purchases the convertible bond instead of a nonconvertible bond?
g. If the price of the common stock should double, would the price of the convertible bond double? Answer in calculation plz
h. If the price of the common stock should decline by 50 percent, would the price of the convertible bond decline by the same percentage? Briefly explain your answer.
i. What is the probability that the corporation will call this bond?
j. Why are investors willing to pay the premiums mentioned in parts (d) and (f)?
Only need answers from g- j
\begin{tabular}{lr} Principal & $1,000 \\ Coupon & 5% \\ Maturity & 15 years \\ Call price & $1,050 \\ Conversion price & $37 (i.e., 27 shares) \\ Market price of the common stock & $32 \\ \hline \end{tabular}Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started