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    Convertible Bonds

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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.
    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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    Solution Preview

    Please see the attached file:

    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

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