A convertible bond has an 7% coupon and 10 years to maturity. The face value is $1000 and the conversion ratio is 35. The stock currently sells for $27.375 per share. Similar nonconvertible bonds are priced to yield 9%. The value of the convertible bond is at least:

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Quizplus · Accepted Answer

The value of a convertible bond is at least the greater of its investment value or its conversion value. The investment value is calculated based on the present value of its coupon payments and the present value of its face value, given the yield of similar nonconvertible bonds (9% in this case). The conversion value is calculated based on the current price of the stock and the conversion ratio. The conversion value is $27.375 * 35 = $958.125. Without calculating the investment value (since it requires more detailed calculations and is not directly given), knowing that the bond's value cannot be less than either its investment value or its conversion value, and given the options, the minimum value provided is $958.125, which is the conversion value. This makes it the minimum value of the convertible bond.

A Convertible Bond Has an 7% Coupon and 10 Years