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Corporation HBM has a convertible bond with the following terms: coupon 5% principal $1,000 maturity 10 years conversion price $50 (20 shares) call price $1,000
- Corporation HBM has a convertible bond with the following terms:
coupon 5%
principal $1,000
maturity 10 years
conversion price $50 (20 shares)
call price $1,000 + one year's interest
The bond's credit rating is BBB, and comparable BBB rated bonds yield 9 percent.
The firm's stock is selling for $45 and pays a dividend of $1.50 a share. The convertible bond is selling for $1,000.
- What is the premium paid over the bond's value as stock?
- Given the bond's income advantage, how long must the investor hold the bond to overcome the premium over the bond's value as stock?
- If the price of the stock rises to $65, is there any reason to expect the firm to call the bond?
- If the convertible bond is held to maturity, what is the annualized return on an investment in the bond?
- If the price of the stock declines to $25 a share while interest rates on BBB rated bonds rise to 12 percent, what impact does the increase in interest rates have on this convertible bond?
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