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

To calculate the straight bond value, we need to use the formula:

Straight Bond Value = (Annual Coupon Payment / Market Interest Rate) x [1 - 1 / (1 + Market Interest Rate) ^ Number of Years] + Face Value / (1 + Market Interest Rate) ^ Number of Years

Annual Coupon Payment = $1,000 x 8% = $80
Market Interest Rate = 9%
Number of Years = 3

Using the above values, we get:

Straight Bond Value = ($80 / 9%) x [1 - 1 / (1 + 9%) ^ 3] + $1,000 / (1 + 9%) ^ 3
Straight Bond Value = $974.69

Therefore, the best choice is C.

Kurt Owns a Convertible Bond That Matures in Three Years