You are considering the purchase of a convertible bond issued by Bildon Enterprises, a non-investment-grade medical service

Question:

You are considering the purchase of a convertible bond issued by Bildon Enterprises, a non-investment-grade medical service firm. The issue has seven years to maturity and pays a semiannual coupon rate of 7.625 percent (i.e., 3.8125 percent per period). The issue is callable by the company at par and can be converted into 48.852 shares of Bildon common stock. The bond currently sells for $965 (relative to par value of $1,000), and Bildon stock trades at $12.125 a share.

a. Calculate the current conversion value for the bond. Is the conversion option embedded in this bond in the money or out of the money? Explain.

b. Calculate the conversion parity price for Bildon stock that would make conversion of the bond profitable.

c. Bildon does not currently pay its shareholders a dividend, having suspended these distributions six months ago. What is the payback (i.e., breakeven time) for this convertible security, and how should it be interpreted?

d. Calculate the convertible's current yield to maturity. If a "straight" Bildon fixedincome issue with the same cash flows would yield 9.25 percent, calculate the net value of the combined options (i.e., the issuer's call and the investor's conversion) embedded in the bond.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...