Consider a Firm That Has an Issue of Convertible Bonds

question 265

Essay

Consider a firm that has an issue of convertible bonds outstanding. The bonds have an annual coupon rate of 8%, a face value of $1,000, and 20 years to maturity. The firm's stock price was $50 when the bonds were issued and the conversion premium was 20%. The current stock price is $55. Compute the conversion price, conversion ratio, and conversion value. Also determine the yield on similar straight bonds at which the conversion value would equal the straight bond value.

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Definitions:

Perforation

A medical condition in which a hole or tear occurs in the wall of any part of the gastrointestinal tract or other bodily organs.

Endoscope

A flexible tube with a light and camera attached, used to examine the interior of a bodily organ or space.

Natural Opening

A passage by which substances or objects can enter or exit an organ or body part naturally.

Artificial Opening

A surgically created opening in the body for the discharge of bodily wastes or other purposes.