Given the Information Below, Answer the Following Questions

question 43

Essay

Given the information below, answer the following questions.

   A convertible bond has the following features:
     Principal            $1,000
     Maturity date            20 years
     Interest                $80 (8% coupon)
     Call price           $1,050
     Exercise price          $65 a share


a. The bond may be converted into how many shares?
  
b. If comparable non-convertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt?

c. If the stock were selling for $52, what is the value of the bond in terms of stock?

d. Would you expect the bond to sell for its value as debt (i.e., the value determined in b)if the price of the stock were $52?

e. If the price of the bond were $960, what are the premiums paid over the bond's value as stock and its value as debt?

f. If the price of the stock were $35, what would be the minimum price of the bond?

g. What is the probability that the bond will be called when the price of the stock is $52?
  
h. If the price of the stock rose to $73, what would happen to the price of the bond?

i. If the price of the stock were $73, what would the investor receive if the bond were called?

j. What will the investor receive when the bond matures?

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Definitions:

Net Float

The difference between checks written against a bank account and those that have been deposited but not yet cleared, affecting the balance.

Chequing Account

A bank account allowing the account holder to withdraw funds, write checks, and use electronic debit to access funds.

Cheque

A cheque is a written, dated, and signed instrument that directs a bank to pay a specific sum of money to the bearer or a named party.

Regional Lockbox System

A banking service that speeds up collection of payments by establishing a network of collection points.