Conversion value and pure bond value
Question 1: D. Hilgers Technology has a convertible bond outstanding, trading in the marketplace at $835. The par value is $1,000, the coupon rate is 9 percent, and the bond matures in 25 years. The conversion ratio is 20, and the company's common stock is selling for $41 per share. Interest is paid semiannually.
a. What is the conversion value?
b. If similar bonds, which are not convertible, are currently yielding 12 percent, what is the pure bond value of this convertible bond?
Pure bond value and change in interests
Question 2: In problem above, if the interest rate on similar bonds, which are not convertible, goes up from 12 percent to 14 percent, what will be the new pure bond value of the Hilgers bonds? Assume the Hilgers bonds have the same coupon rate of 9 percent as described in problem above, and that 25 years remain to maturity. Use semiannual analysis.
Current yield on a convertible bond
Question 3: Western Pipeline, Inc., has been very successful in the last five years. Its $1,000 par value convertible bonds have a conversion ratio of 28. The bonds have a quoted interest rate of 5 percent a year. The firm's common stock is currently selling for $43.50 per share. The current bond price has a conversion premium of $10 over the conversion value.
1. What is the current price of the bond?
2. What is the current yield on the bond (annual interest divided by the bond's market price)?
3. If the common stock price goes down to $22.50 and the conversion premium goes up to $100, what will be the new current yield on the bond?