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Conversion Values

1. A $5,000 face value municipal bond matures in 8 years and has a market value of $5,120. The coupon rate is 3.5 percent with interest paid semiannually. What is the yield to maturity?

2. A bond has a par value of $1,000 and a market price of $1,087.20. The conversion price is $40 and the stock price is $41.75. What is the conversion value?

3. An investor has a critical marginal tax rate of 28.5 percent when municipal bonds are yielding 5.1 percent. What is the corporate bond yield?

4. A 6 percent, semi-annual coupon bond has a face value of $1,000 and a time to maturity of 4 years. The bonds are convertible into shares of common stock at a conversion price of $40. The stock price currently is $40.70. Similar, non-convertible bonds have a yield to maturity of 5.6 percent. The intrinsic value of this bond is _____ and the conversion value is _____.

5. Municipal bonds are yielding 4.8 percent currently. Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent. Alicia's equivalent taxable yield is _____ percent and Yvonne's is _____ percent.

6. You own a bond that has a face value of $1,000 and a conversion ratio of 25. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.
A. convert; less than the call price by $40.00
B. convert; greater than the call price by $40.00
C. convert; greater than the call price by $4.75
D. not convert; less than the call price by $10.00
E. not convert; greater than the call price by $40.00

7. A Treasury bond has a quoted bid price of 100:10 and a quoted ask price of 100:11. What is the amount you will receive if you sell your bond that has a par value of $20,000?

8. The Toy Store owns 1,500 shares of preferred stock in Conner's Mfg. Conner's Mfg. that pays a quarterly dividend of $1.05 a share. The Toy Store receives annual dividend income from Conner's Mfg. in the amount of _____, of which at least _____ is exempt from income taxation.

9. Sonya has a marginal tax rate of 36 percent. A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent. Sonya should invest in the _____ bond because the critical marginal tax rate is _____ percent.
A. corporate; 17
B. corporate; 34
C. corporate; 51
D. municipal; 43
E. municipal; 51

10. A bond is callable in 2 years and currently has a yield to call of 4.8 percent. The bond has a coupon rate of 5 percent and pays interest semi-annually. The call premium is $50 and the face value is $1,000. What is the current price?

Solution Summary

The solution discusses conversion values.