Herring Inc. is considering issuing 15-year, 8% semiannual coupon, $1,000 face value convertible bonds at a price of $1,000 each. Each bond would be convertible into 25 shares of common stock. If the bonds were not convertible, investors would require an annual nominal yield of 10%. What is the straight-debt value of the bond at the time of issue?

Question

Quizplus · Accepted Answer

The straight-debt value of the bond is calculated by discounting the bond's cash flows (coupon payments and face value) at the required yield for non-convertible bonds. The semiannual coupon payment is $40 (8% of $1,000 divided by 2), and the required yield is 5% per period (10% annual yield divided by 2). Using these values, the present value of the bond's cash flows is approximately $846.28.