Question
A firm has just issued a 30-year callable, convertible bond with a coupon rate of 5 percent. The bond makes semi-annual coupon payments. The par
A firm has just issued a 30-year callable, convertible bond with a coupon rate of 5 percent. The bond makes semi-annual coupon payments. The par value of the bond is $1,000. The bond has a conversion price of $50. The companys stock is currently selling for $30 per share. The owner of the bond will be forced to convert if the bonds conversion value is ever greater than or equal to $1,300. The required return on an otherwise identical nonconvertible bond is 7 percent.
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a) Find the current conversion value and the value of the straight bond (i.e., value of the bond without the call options). What is the value of the convertible bond?
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b) Ifthestockpriceweretogrowby8percentperyearforever,howlongwouldittakefor the bonds conversion value to exceed $1,300?
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c) Assume that the stock price has grown at 8% a year as expected and the bond is converted when the conversion value is 1,300. What value would you assign to this bond?
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