Given the follow information concerning a convertible Bond:

• Principal: $1000
• Coupon: 5%
• Maturity: 15 years
• Call Price: $1,050
• Conversion Price: $37(i.e., 27 shares)
• Market Price of Common Stock: $32
• Market Price of Bond: $1,040

a. What is the current yield of this bond ?

b. What is the value of the bond based upon the market price of the common stock ?

c. What is the value of the common stock based upon the market price of the bond ?

d. What is the premium in terms of the stock that the investor pays when he or she purchases the convertible bond instead of the stock ?

e. Nonconvertible bonds are selling with a yield to maturity of 7 percent. If this bond lacked the conversion feature, what would the approximate price of the bond be ?

f. What is the premium in terms of debt that the investor pays when he or she purchases the convertible bond instead of the non-convertible bond ?

g. What is the probability that the corporation will call this bond ?

h. Why are investors willing to pay the premiums mentioned in questions d and f ?