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Convertible Bonds

1. MD Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. The have a 10 percent annual coupon interest rate and a 20 year maturity. The interest rate on a straight bond of similar risk is currently 12 percent.

a.) Calculate the straight bond value of the bond.
b.) Calculate the conversion (or stock) value of the bond when the market price of the common stock is $15, $20, $23, $30 and $45 per share.
c.) For each of the stock prices given in part b, at what price would you expect the bond
d.) What is the least you would expect the bond to sell for, regardless of the common stock price behavior?

2. Find the value of a semi-annual bond maturing in 6 years, with a $1,000 par value and a coupon interest rate of 10 percent if the required return on similar-risk bonds is 14 percent annual interest rate

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1. MD Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. The have a 10 percent annual coupon interest rate and a 20 year maturity. The interest rate on a straight bond of similar risk is currently 12 percent.
a.) Calculate the straight bond value of the bond.

We calculate the straight value assuming annual payments of coupon interest (since nothing is mentioned)

Calculating Value of a bond
To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Value of bond= PVIF * Maturity value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n

Data
No of years to maturity= 20
Coupon rate= 10.00%
Face value= $1,000
Frequency = A (Annual Coupon payments)
Discount rate annually= 12.00% (Yield to maturity)
Maturity value = Face Value= $1,000

Calculation of bond price:
Interest ...

Solution Summary

Calculates straight value, conversion value, selling price of a convertible bond

$2.19