Assignment: Investment
Given Principal $1,000 Coupon 5% Maturity 15 years Call price $1,050 Conversion price $37 i.e. 27 shares Market price of common stock $32 Market price of bond $1,040.
i. What is the current yield of this bond?
ii. What is the value of the bond based on the market price of the common stock?
iii. What is the value of the common stock based on the market price of the bond?
iv. What is the premium in terms of stock that the investor pays when he or she ¬purchases the convertible bond instead of the stock?
v. Nonconvertible bonds are selling with a yield to maturity of 7 percent. If this bond lacked the conversion feature, what would the approximate price of the bond be?
vi. What is the premium in terms of debt that the investor pays when he or she purchases the convertible bond instead of a nonconvertible bond?
vii. If the price of the common stock should double, would the price of the convertible bond double? Briefly explain your answer.
viii. If the price of the common stock should decline by 50 percent, would the price of the convertible bond decline by the same percentage? Briefly explain your answer.
ix. What is the probability that the corporation will call this bond?
x. Why are investors willing to pay the premiums mentioned in parts (iv) and (vi)?
Format your assignment according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.