A convertible bond has a face value of $1,000 and a conversion price of $22.50. The bond has a 6 percent coupon and pays interest semi-annually. The bond matures in six years. Similar bonds are yielding 9 percent. The current price of the stock is $23.24. What is the straight bond value?
A) $863.22
B) $865.42
C) $940.91
D) $1,000.00
E) $1,033.33

Question

Quizplus · Accepted Answer

The straight bond value is calculated by discounting the bond's cash flows (coupon payments and face value) at the yield of similar bonds (9%). The bond pays $30 every six months (6% of $1,000 annually, divided by 2), and the face value of $1,000 is paid at maturity. The present value of these cash flows at a 9% yield is approximately $863.22.

A Convertible Bond Has a Face Value of $1,000 and a Conversion