A 12% coupon convertible bond has 20 years to maturity.Market rates on similar non-convertible bonds are 9.25%.Each bond is convertible into 20 common.The shares are currently trading at $40.What is the floor value of the bond, assuming annual coupon payments?

Question

Quizplus · Accepted Answer

The floor value of the bond is calculated based on its value as a regular bond, ignoring the conversion option. This involves discounting its annual coupon payments and the principal repayment at maturity at the market rate for similar non-convertible bonds. The annual coupon payment is 12% of the face value ($1,000), which is $120. The present value of these coupon payments and the principal repayment can be calculated using the formula for the present value of an annuity and the present value of a lump sum, respectively, with a discount rate of 9.25% over 20 years. The calculation confirms that the floor value is closest to $1,247, making option A correct.

A 12% Coupon Convertible Bond Has 20 Years to Maturity