SUBJECT: Convertible Bond

Assume the following convertible bond data:

20-year, 8.5% annual coupon, callable convertible bond will sell at its $1,000 par value; straight debt issue would require a 10% coupon.

Call protection = 5 years and call price = $1,100. Call the bonds when conversion value > $1,200, but the call must occur on the issue date anniversary.

P0= $20; rs= 13.4%; g = 8%.

Conversion ratio = CR = 40 shares.

What conversion price (Pc) is built into the bond?

What is (1) the convertibles straight debt value and (2) the implied value of the convertibility feature?