Question

You have been hired to value a new 30-year callable, convertible bond, with a $1,000 par value. The bond has a coupon rate of 5.3 percent, payable annually. The conversion price is $99, and the stock currently sells for $38.40. The stock price is expected to grow at 10 percent per year. The bond is callable at $1,200, but, based on prior experience, it won’t be called unless the conversion value is $1,300. The required return on this bond is 7 percent. What value would you assign to this bond?

Answer 1

Strait value N: 30, of bond Pmt - $ 53 FV = $ 1000, r: 7% FV present value - PMT - x - Tin + - 1 (1+r)^ pament vitae s e pot con of one or more interest 1000 53 PV = 0.07 pu = 657.67 + 131.37 = $ 789.04 1000 10.10 FV conversion writto alle prese 10. 10 Convertion . = 9.99 ratio (CR) CP = price x CR convertion value (cv) 18.00 = = 38.4 x 10.16 38.4 x 10

Current conversion value = 3870 88 Bond will be called when conversion price = $1300 387.88 x lolot 1300 din (1. lojt = in/ 1300 l 1 387.38) 387.58 t In (1.10) = 1. 2094 t = 12. 6906 years Ace 53 present value = X 11002)'.6906 * (1.00-18.8806 0.07 pv = 472.029 + 489.53 pu - $ 961.56 value o Current bond = $ 961. 56