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Fernandez Guitars: Computer conversion premium for convertible bond to stock.

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Fernandez Guitars, has a convertible bond quoted on the NYSE bond market at 85. (Bond quotes represent percentage of par value. Thus, 70 represents $700, 80 represents $800, and so on.) The bond matures in 15 years and carries a coupon rate of 6½ percent. The conversion price is 20, and the common stock is currently selling for $12 per share on the NYSE.

a. Compute the conversion premium.

b. At what price does the common stock need to sell for the conversion value to be equal to the current bond price?

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Solution Summary

This solution shows the calculations and answers for the conversion premium and the selling price in an attached Excel file.

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