Consider a fiRm That Has an Issue of Convertible Bonds

question 393

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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