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A convertible bond has a coupon of 9
A convertible bond has a coupon of 9.5 percent, paid semiannually, and will mature in 18 years. If the bond were not convertible, it would be priced to yield 8.5 percent. The conversion ratio on the bond is 15 and the stock is currently selling for $41 per share. What is the minimum value of this bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Minimum Value:
Expert Solution
Computation of Price of Bond using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Price of Bond = ?
Rate = 8.5%/2 = 4.25%
Nper = 18 years *2 = 36 Periods
PMT = $1,000*9.5%/2 = $47.50
FV = $1,000
Substituting the values in formula:
=-pv(4.25%,36,47.50,1000)
PV or Price of Bond = $1,091.35
Conversion Value = Converstion Ratio * Stock Price = 15 * $41 = $615
Minimum value is the greater of bond price or conversion value
Hence, minimum value = $615
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