A convertible bond has an 7% annual coupon and 10 years to maturity.The face value is €1,000 and the conversion ratio is 35.The equity currently sells for €27.375 per share.Similar nonconvertible bonds are priced to yield 9%.The value of the convertible bond is at least:

Question

Quizplus · Accepted Answer

To calculate the minimum value of the convertible bond, we can use the following formula:

Minimum value of convertible bond = max [(Value of straight bond), (Conversion value of bond)]

Value of straight bond = (Annual coupon payment / Yield to maturity) + (Face value / (1 + Yield to maturity)^n) 
= (70 / 0.09) + (1000 / (1 + 0.09)^10) 
= €983.62

Conversion value of bond = (Current stock price * Conversion ratio) 
= (€27.375 * 35) 
= €958.13

Therefore, the minimum value of the convertible bond is €958.13, which is answer choice B.

A Convertible Bond Has an 7% Annual Coupon and 10