A convertible bond has a face value of $1,000 and a conversion price of $12.50.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 9 percent.The current price of the stock is $13.40 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, which include the semi-annual coupon payments and the face value at maturity. The bond's yield to maturity is 9%, which is the rate that equates the present value of the bond's future cash flows to its current price. The bond's current price is $782.57, which is the present value of the bond's future cash flows discounted at a yield to maturity of 9%.

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