The following facts apply to a convertible bond making semiannual payments: Conversion price $ 46 /share...
The following facts apply to a convertible bond making semiannual payments:
Conversion price $ 46 /share
Coupon rate 7.2 %
Par value $ 1,000
Yield on nonconvertible debentures of same quality 8 %
Maturity 30 years
Market price of stock $ 45 /share
What is the minimum price at which the convertible should sell?
Homework Answers
Price of straight
bond=1000*7.2%/8%*(1-1/1.08^30)+1000/1.08^30
=909.9377333
Price of converted shares=1000/46*45=978.2608696
Minimum price=978.2608696
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