Microsoft is considering issuing $10b face value of convertible bonds with 10-year maturity at a premium of 40% on the current stock price.

1. Why do companies issue convertible bonds?
2. What is the conversion price and conversion ratio of the bond?
3. What is the value of the embedded call option on $1000 face value of the bond?
4. What is the value of the straight bond component?

For the Yield to maturity of the straight bond component, use the YTM of the following MSFT bond currently trading (data as of 4/28/2022).

Maturity	Coupon	Price (as of June 4, 2020)	Yield
5/2/2033	2.625%	$108.63

1. What is the coupon rate on a newly issued comparable straight bond with no convertibility option?
2. What is the appropriate coupon rate on the convertible bond?
3. Explain the difference in the coupon rates in (h) and (i) above.

Note:

For Risk-free rate R_f, use the Yield (using the asked price) of the following T-bond (price below as of April 29, 2022:

maturity	Coupon	Bid Price	Asked Price	Yield to Maturity
2/15/2031	1.875	91.14	91.15
			152.0660

Assume that market risk premium (R_m R_f) = 6%