Question

QUESTION 133

1. Badger owns a convertible bond with an 8% annual coupon and a $1,000 face value. It matures in ten years and can be exchanged for 45 shares of ACE stock, which is trading at $27 per share. Similar nonconvertible bonds are priced to yield 10%. The value of the convertible bond is at least __________?

   		a. $215.00.
   		b. $877.11.
   		c. $1,000.00.
   		d. $1,215.00.

QUESTION 134

1. Xyzal owns a convertible bond with a 9% annual coupon and a $1,000 face value. It matures in 12 years and can be exchanged for 30 shares of Zyrtec stock, which is trading at $35 per share. Similar nonconvertible bonds are priced to yield 7.5%. The value of the convertible bond is at least __________?

   		a. $1,000.00.
   		b. $1,050.00.
   		c. $1,116.03.
   		d. $1,197.34.

Answer 1

133). Conversion Value = Market Price * No. of shares outstanding = $27 * 45 = $1,215

Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{8%*$1,000} * {(1 - (1 + 0.10)^-10) / 0.10}] + [$1,000 / {1 + 0.10}^10]

= [$80 * {0.6145 / 0.10}] + [$1,000 / 2.5937]

= [$80 * 6.1446] + $385.54

= $491.57 + $385.54 = $877.11

The minimum value of the bond is greater of the conversion value and straight bond value.

So, The value of the convertible bond is at least $1,215

Hence, Option "d" is correct.

134). Conversion Value = Market Price * No. of shares outstanding = $35 * 30 = $1,050

Bond's Market Value = PV of Coupon Payment + PV of Maturity Value

= [Periodic Coupon Payment * {(1 - (1 + r)^-n) / r}] + [Face Value / (1 + r)^n]

= [{9%*$1,000} * {(1 - (1 + 0.075)^-12) / 0.075}] + [$1,000 / {1 + 0.075}^12]

= [$90 * {0.5801 / 0.075}] + [$1,000 / 2.3818]

= [$90 * 7.7353] + $419.85

= $696.18 + $419.85 = $1,116.03

The minimum value of the bond is greater of the conversion value and straight bond value.

So, The value of the convertible bond is at least $1,116.03

Hence, Option "c" is correct.