Suppose You Are Evaluating a Bond That Can Be Exchanged

question 145

Multiple Choice

Suppose you are evaluating a bond that can be exchanged for shares of the issuing company's stock at a conversion price of $5 per share. The bond has a $50 annual coupon, five years to maturity, and straight debt of the same risk is priced to yield 8%. The current share price for the issuing firm is $4.50. What is the minimum value for which the bond should sell?

• A) $848.37
• B) $880.22
• C) $900.00
• D) $921.12
• E) $1,000.00

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Definitions:

Risk Aversion

A preference for avoiding losses over achieving equivalent gains.

Security Market Line

A representation in financial markets showing the relationship between risk and return for individual securities.

Expected Inflation Rate

The anticipated rate at which the general level of prices for goods and services will rise over a certain period of time.

Required Returns

The minimum return an investor expects to achieve by investing in a particular asset, taking into account its risk level.