Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the MSFT option prices below (prices at closing on June 3, 2021). Microsoft current stock price is $247.30 Assume no dividends Expiry of options

Consider the MSFT option prices below (prices at closing on June 3, 2021).

  • Microsoft current stock price is $247.30
  • Assume no dividends
  • Expiry of options September 17, 2021 (assume 105 days to expiration)

Calls (EXPIRATION: 12/20/2020) PUTS (EXPIRATION 12/20/2020)

Strike

Price

Intrinsic value

Implied Variance

Strike

Price

Intrinsic Value

Implied Variance

240

$15.95

240

$8.96

270

$3.41

195

$25.45

  1. Identify the above options as in-the-money and out-of-the-money.
  2. Why are the intrinsic values different from the market prices?
  3. What is the annual implied volatility of returns of MSFT shares in the options with strike price of 240?

Microsoft is considering issuing $10b face value of convertible bonds with 10-year maturity at a premium of 40% on the current stock price.

  1. Why do companies issue convertible bonds?
  2. What is the conversion price and conversion ratio of the bond?
  3. What is the value of the embedded call option on $1000 face value of the bond?
  4. What is the value of the straight bond component?

For the Yield to maturity of the straight bond component, use the YTM of the following MSFT bond currently trading (data as of 6/4/2020).

Maturity

Coupon

Price (as of June 4, 2020)

Yield

5/2/2033

2.625%

$125.12

  1. What is the coupon rate on a newly issued comparable straight bond with no convertibility option?
  2. What is the appropriate coupon rate on the convertible bond?
  3. Explain the difference in the coupon rates in (h) and (i) above.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance Building Your Future

Authors: Robert B. Walker, Kristy P. Walker

1st edition

ISBN: 9780077861728, 978-0073530659

More Books

Students also viewed these Finance questions