Question

The following facts apply to a convertible bond making semiannual payments:

  

Conversion price	$	52	/share
Coupon rate		6.6	%
Par value	$	1,000
Yield on nonconvertible debentures of same quality		7	%
Maturity		20	years
Market price of stock	$	51	/share

  

What is the minimum price at which the convertible should sell? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Minimum price

$

Answer 1

1 $ 1,000 6.6% 2 4 $ 33 20 A B A Par value (FV) B Coupon rate C|Number of compounding periods per D = AXB/C Interest per period (PMT) E Number of years to maturity Number of compounding periods till F = CxE maturity (NPER) Market rate of return/Required rate G of return Market rate of return/Required rate G/C of return per period (RATE) Stright bond value 6 40 7% 3.5% PV(RATE,NPER,PMT,FV)*-1 11 Stright bond value $ 957.29 =PV(3.5%,40,33,1000)*-1 Bond conversion value 980.77 =1000*51/52 $ 980.77 Minimum price |(Higher of stright bond value and bond conversion value)

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