A convertible bond has a face value of $1,000 and a conversion price of $25. The bond has a coupon rate of 6.5 percent, pays interest semi-annually, and matures in 13 years. Similar bonds are currently yielding 6.8 percent. The current price of the related stock is $25.40 per share. What is the straight bond value?

Question

Quizplus · Accepted Answer

The straight bond value is the present value of the bond's future cash flows, discounted at the current yield rate. The bond's future cash flows include the semi-annual coupon payments and the face value at maturity. The current yield rate is 6.8 percent, which is the same as the yield to maturity. The present value of the bond's future cash flows is $974.38.

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