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Convertible Security and Wheat Future Contracts

1. The following facts apply to a convertible security:
Conversion price $25/share
Coupon rate 6%
Par value $1,000
Yield on nonconvertible debenture of same quality 10%
Market value of straight bond of same quality with coupon rate of 10% $950
Stock price $24/share
a. What is the minimum price at which the convertible should sell?
b. What accounts for any premium in the market price of the convertible over the value of the common stock into which it can be converted?

2. The following table lists the closing prices for wheat futures contracts. Suppose you bought one contract at $5.00 at the opening of trade on March 15.
March 15 $5.03
March 16 $5.08
March 17 $5.12
March 18 $5.10
March 19 $4.98
a. Suppose that on March 18 you receive from your broker a notice of delivery on that day.
i. What is the delivery price?
ii. What price did you pay for wheat?
iii. List the cash flows associated with this contract.
b. Suppose that on March 19 you receive from your broker a notice of delivery on that day.
i. What is the delivery price?
ii. What price did you pay for wheat?
iii. List the cash flows associated with this contract.

Solution Preview

1.  The following facts apply to a convertible security:
Conversion price $25/share
Coupon rate 6%
Par value $1,000
Yield on nonconvertible debenture of same quality 10%
Market value of straight bond of same quality with coupon rate of 10% $950
Stock price $24/share
a. What is the minimum price at which the convertible should sell?
b. What accounts for any premium in the market price of the
convertible over the value of the common stock into which it can be converted?

a. What is the minimum price at which the convertible should sell?

Par value= $1,000
Conversion price= $25
Therefore, number of shares that the bond can be converted into= 40 =1000/25
Current share price= $24
Therefore, conversion value of the ...

Solution Summary

Answers to 2 questions on convertible security, wheat futures contracts.

$2.19