Purchase Solution

# Convertible Bonds

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Bernanke Corp. has just issued a 30 year callable, convertible bond with a coupon rate of 7 percent annual coupon payments. The bond has a conversion price of \$125. The company's stock is selling for \$32 per share. The owner of the bond will be forced to convert if the bond's conversion value is ever greater than or equal to \$1,000. The required return on an otherwise identical nonconvertible bond is 12 percent.

a. What is the minimum value of the bond?
b. If the stock price were to grow by 15 percent per year forever, how long would it take for the bond's conversion value to exceed \$1,100?

##### Solution Summary

Calculates the minimum value of the convertible bond and the amount of time it would take for the conversion value of the bond to exceed \$1,100.

##### Solution Preview

Bernanke Corp. has just issued a 30 year callable, convertible bond with a coupon rate of 7 percent annual coupon payments. The bond has a conversion price of \$125. The company's stock is selling for \$32 per share. The owner of the bond will be forced to convert if the bond's conversion value is ever greater than or equal to \$1,000. The required return on an otherwise identical nonconvertible bond is 12 percent.

a. What is the minimum value of the bond?
Minimum value of the bond = Higher of bond value and conversion value
Conversion Value -- The value of the convertible security in terms of the common stock into which the security can be converted. It is equal to the conversion ratio times the current market ...

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