Question
Convertible bond problem You are looking at the risk and return of investing in a convertible bond versus the companys common stock. You see the
Convertible bond problem You are looking at the risk and return of investing in a convertible bond versus the companys common stock. You see the company has issued a convertible bond with $1000 par value, 10 years to maturity, 6% coupon (assume annual pay for simplicity). The bond is convertible at any time into 20 shares of stock. The stock is currently trading at $42 per share. This company also has some nonconvertible bonds outstanding which have 9 years to maturity, and which are trading with a 7% YTM.
What is the convertible bonds straight bond value?
What is the convertible bonds conversion value?
What approximate assumed price would you expect the convertible bond to be trading at? Explain.
What will be your 1-year rate of return on the convertible bond if you purchased it at your assumed price above and if the stock price is $50 one year from now? What about $60? $30?
What will be your 1-year rate of return if instead you purchased the stock at its current price and if the stock price is $50 one year from now? What about $60? $30?
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