Exhibit 20.1

The following data apply to Saunders Corporation's convertible bonds: $\begin{array}{lrlr}
\text { Maturity } & 13 & \text { Stock price } & \$ 34.00 \
\text { Par value } & \$ 1,000 & \text { Conversion price } & \$ 43.00 \
\text { Annual coupon } & 5.20 \% & \text { Straight-debt yield } & 9.80 \%
\end{array}$
-Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?

Question

Exhibit 20.1
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The following data apply to Saunders Corporation's convertible bonds: $\begin{array}{lrlr}
\text { Maturity } & 13 & \text { Stock price } & \$ 34.00 \
\text { Par value } & \$ 1,000 & \text { Conversion price } & \$ 43.00 \
\text { Annual coupon } & 5.20 \% & \text { Straight-debt yield } & 9.80 \%
\end{array}$
-Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?

Quizplus · Accepted Answer

The straight-debt value of a bond can be calculated by discounting its future cash flows (annual coupon payments and the par value at maturity) at the straight-debt yield. Given an annual coupon of 5.20% on a $1,000 par value, the annual coupon payment is $52. The bond matures in 13 years, and the straight-debt yield is 9.80%. Using the formula for the present value of an annuity and the present value of a single sum for the par value, the calculation is as follows:$$ \text{Present Value of Coupons} = \frac{\$52}{0.098} \times \left(1 - \frac{1}{(1 + 0.098)^{13}}\right) $$$$ \text{Present Value of Par Value} = \frac{\$1,000}{(1 + 0.098)^{13}} $$$$ \text{Present Value of Coupons} \approx \$52 \times 7.103 \approx \$369.36 $$$$ \text{Present Value of Par Value} \approx \$295.47 $$Adding these two components gives the straight-debt value:$$ \$369.36 + \$295.47 \approx \$664.83 $$The closest answer provided is D) $669.83, which suggests a minor calculation or rounding difference in the exact process but follows the correct methodology for determining the straight-debt value.

Exhibit 20 -Refer to Exhibit 20