A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________.
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Market value of stock = $19 * 40 shares = $760 Show more…
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A convertible bond is selling for $800. It has 10 years to maturity, a $1000 face value, and a 10% coupon paid semi-annually. The conversion price, specified at the time the convertible bond is issued, is $50 per share [in other words, if one bond is converted, the number of shares obtained in return equals the face value of the bond divided by this conversion price]. Non-convertible bonds issued by the same firm with the same face value, term to maturity, and coupon are priced to yield an effective semi-annual return of 7.2%. The stock currently sells for $31.375 per share. a) What is the value of the convertible bond considered as a straight bond? b) If the bond is converted to shares, how many shares are equivalent to the convertible bond given its face value? What is the value of that share portfolio? c) Calculate the convertible bond's option value.
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