Kurt owns a convertible bond that matures in three years. The bond has an 8 percent coupon and pays interest annually. The face value of the bond is $1,000 and the conversion price is $16.67. Similar bonds have a market return of 9 percent. The current price of the stock is $17.50. What is the straight bond value?

Question

Quizplus · Accepted Answer

The straight bond value is the present value of the future cash flows from the bond, which includes the annual coupon payments and the face value at maturity. The present value of the future cash flows can be calculated using the following formula:PV = C * (1 - (1 + r)^-n) / r + FV / (1 + r)^nwhere:PV is the present valueC is the annual coupon paymentr is the market returnn is the number of years to maturityFV is the face valueIn this case, the annual coupon payment is $80 (8% * $1,000), the market return is 9%, the number of years to maturity is 3, and the face value is $1,000. Plugging these values into the formula, we get:PV = $80 * (1 - (1 + 0.09)^-3) / 0.09 + $1,000 / (1 + 0.09)^3PV = $974.69Therefore, the straight bond value is $974.69.

Kurt Owns a Convertible Bond That Matures in Three Years