4.

Convertible Bond Value

Brewers Medical Supplies, Inc., recently issued a single zero-

coupon convertible bond due 10 years from today. The convertible bond, which is currently trading for

$350 in the open market, has a face value of $1,000.00 and can be converted into 25 shares of common

stock. Each share of Brewers common stock is currently selling for $11.50, and otherwise identical non-

convertible bonds yield 12.00 percent per annum (effective annual yield, but remember we compound

semi-annually).

a.

What is the straight bond value of the convertible bond?

b.

What is its conversion value?

c.

What is its option value?