Convertible Bond Analysis

Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $60.70, and the common stock price was $56 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.65% at the time Roop's bonds were issued.

1. The bonds originally sold for $1,000. If interest rates on A-rated bonds had remained constant at 8.65% and if the stock price had fallen to $37.25, then what do you think would have happened to the price of the convertible bonds? (Assume no change in the standard deviation of stock returns.) Round your answers to the nearest cent. Enter all amounts as a positive number.

   The value of straight bond would have increased from $ _________ at the time of issue to $ ________ fifteen years later.

2. Now suppose that the price of Roop's common stock had fallen from $56 on the day the bonds were issued to $37.25 at present, 15 years after the issue. Suppose also that the interest rate on similar straight debt had fallen from 8.65% to 5.75%. Under these conditions, what is the current price of the straight-bond portion of the convertible bond? Do not round intermediate calculations. Round your answer to the nearest dollar. Enter all amounts as a positive number.

   $ _______ per bond

   What is the current value if a bondholder converts a bond? Do not round intermediate calculations. Round your answer to the nearest cent.

   $ _______ per share