Swift Shoe has convertible bonds outstanding that are callable at $1,050. The bonds are convertible into 21 shares of common stock. The stock is currently selling for $64.00 per share.

a. If the firm announces that it is going to call the bonds at $1,050, what action are bondholders likely to take.

multiple choice 1

• They will probably convert the bonds to common shares.

• They will not probably convert the bonds to common shares.

b. Assume that instead of the call feature, the firm has the right to drop the conversion ratio from 21 down to 19 after 5 years and down to 17 after 10 years. If the bonds have been outstanding for 4 years and 11 months, what will the price of the bonds be if the stock price is $66.60? Assume the bonds carry no conversion premium. (Round the final answer to 2 decimal places.)

Bond price $

c. Further assume that you anticipate in two months that the common stock price will be up to $68.60. Considering the conversion feature, should you convert now or continue to hold the bond for at least two more months?

multiple choice 2

• You should convert now.

• You should hold on for two more months.