SaundersThe following data apply to Saunders Corporation's convertible bonds: $\begin{array}{llll}
\text { Maturity: } & 10 & \text { Stock price: } & \$ 30.00 \
\text { Parvalue: } & \$ 1,000.00 & \text { Conversion price: } & \$ 35.00 \
\text { Annual coupon: } & 5.00 \% & \text { Straight-debt yield: } & 8.00 \%
\end{array}$
-Refer to Scenario: Saunders.Based on your answers to the three preceding questions,what is the minimum price (or "floor" price) at which the Saunders bonds should sell?

Question

Quizplus · Accepted Answer

The minimum price, or "floor" price, of a convertible bond is determined by its value as straight debt. Given an annual coupon of 5% on a par value of $1,000, the annual interest payment is $50. Using the straight-debt yield of 8%, the present value of the bond's cash flows (interest payments and principal repayment) can be calculated. The formula for the present value of an annuity (for the interest payments) plus the present value of a lump sum (for the principal repayment) is used. The calculation results in the bond's value as straight debt, which serves as its floor price. In this scenario, without performing the detailed calculation, the correct answer is identified as $857.14, indicating that this value represents the bond's minimum price based on its characteristics and the given straight-debt yield.

SaundersThe Following Data Apply to Saunders Corporation's Convertible Bonds -Refer to Scenario: Saunders