A It Is January 1, 2006 and You Are Considering

question 49

Essay

a. It is January 1, 2006 and you are considering buying $20,000 of Hilever Company's 10% bonds, which come due on December 31, 2015. The bonds pay interest semiannually on June 30 and December 31 of each year. The prevailing interest rate on bonds of similar risk is 12%. How much would you be prepared to pay for the bond?

b. If coupon rate was 12% on these bonds, how much would you be prepared to pay?

c. If the coupon rate was 10% and the bonds were convertible into common equity (5 shares for every $1,000 face value coupon bond), and common stock is currently trading at $11 per share would this change your answer to part a? Why?

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Definitions:

Postage Stamps

Adhesive paper evidence for payment of postage, used to indicate that the postage fee for sending an item through the postal service has been paid.

Accountant

A professional who manages, audits, and analyzes financial records and transactions for individuals, businesses, and organizations.

Ledger

A-book or digital record that summarizes and categorizes all financial transactions of a business during an accounting period.

Normal Debit Balance

The expected balance type of an account based on conventional accounting rules; assets and expenses usually have a normal debit balance.