An 8%, semi-annual coupon bond has a face value of $1,000 and matures in 8 years. The bond is convertible into shares of common stock at a conversion price of $38. The stock price currently is $41.30. Similar, non-convertible bonds have a yield to maturity of 9.2%. What are the intrinsic value and conversion of this bond?

Question

Quizplus · Accepted Answer

To find the intrinsic value, we use the formula:
Intrinsic value = PV of future coupons + PV of face value
= [40/(1+0.046)^1 + 40/(1+0.046)^2 + ... + 40/(1+0.046)^16] + 1000/(1+0.046)^16
= $933.08

To find the conversion value, we use the formula:
Conversion value = Conversion ratio x Stock price
= (Face value / Conversion price) x Stock price
= (1000/38) x 41.30
= $1,086.84

Therefore, the correct answer is option B.

An 8%, Semi-Annual Coupon Bond Has a Face Value of $1,000