Defense Systems Inc. has convertible bonds outstanding that are callable at $$1,040.$ The bonds are convertible into $20$ shares of common stock. The stock is currently selling for $$62\mathrm{.}90$ per share.

a$.$ If the firm announces it is going to call the bonds at $$1,040,$ what action are bondholders likely to take?

Bondholders will most likely convert their bonds to shares of common stock.

Bondholders will most likely allow their bonds to be called.

b$.$ Assume that instead of the call feature, the firm has the right to drop the conversion ratio from $20$ down to $18\mathrm{.}00$ after $5$ years and down to $16\mathrm{.}00$ after $10$ years. If the bonds have been outstanding for four years and $11\mathrm{.}00$ months, what will the price of the bonds be if the stock price is $$64\mathrm{.}50?$ Assume the bonds carry no conversion premium. $($Do not round intermediate calculations and round your answer to $2$ decimal places.$)$

Bond price

c$.$ Further assume that you anticipate that the common stock price will be up to $$69\mathrm{.}00$ in two months. Considering the conversion feature, should you convert now or continue to hold the bond for at least two more months?

You should hold on for two more months.

You should convert now.