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Q6 Company X issued a 5%, 15-year convertible callable bond today, with a conversion price of $25, currently trading at its par. The market perceives
Q6 Company X issued a 5%, 15-year convertible callable bond today, with a conversion price of $25, currently trading at its par. The market perceives a 3% risk premium for a straight bond with the same features. The bond can be called from now on, with a call price of $1,300, and only can be called at anniversary. The share price of the company is $22/share today, with a return on equity of 10%. The pay-out ratio will stay at a constant rate of 40%. 1. What is the straight bond's value? 2. What is the value of the conversion option today? 3. What is the conversion value today? 4. When should the company call the bond? 5. What is the Yield-to-call, and Yield-to-conversion when the company calls? 6. As the convertible bondholder, what yield will you expect to get? Why
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