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A Ten years ago, Rossie Bhd had issued RM1,000 par value, 8% convertible bonds with a maturity period of 15 years. The convertible bond gives
A Ten years ago, Rossie Bhd had issued RM1,000 par value, 8% convertible bonds with a maturity period of 15 years. The convertible bond gives the holders the right to convert their bonds at a specified future date into new equity shares of the company. However, the bond may also be callable at any time after 3 years with a call penalty of two years interest being payable. If the bond is converted, the conversion price is RM25. Rossie Bhd is paying an annual constant dividend of RM1.25 per share on its ordinary share. Currently, the shareholders of Rossie Bhd requires a rate of retum at 10% per annum whilst the current market rate of a similar bond yielding 12% per annum. Required: i) Determine the minimum value of the bond. Explain your answer. (7 marks) ii) iii) Justify whether Rossie Bhd would call the above bonds. (4 marks) What action should you suggest Rosie Bhd consider if the market interest rates fall by 4%. No calculation is required. (2 marks)
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