Tangshan Mining Company has an outstanding issue of convertible bonds with a $1,000 par value. The bonds have a 10 percent coupon rate, have a 10-year maturity, and are convertible into 100 shares of common stock. The yield to maturity on bonds of similar risk is 10 percent. Based on this information, the straight bond value of the bond is ________.
A) $1,000.00
B) $978.39
C) $1,087.36
D) $1,123.86

Question

Quizplus · Accepted Answer

The straight bond value of the bond is calculated based on its coupon payments and the principal amount, discounted back at the yield to maturity (YTM) rate. Since the bond's coupon rate (10%) is equal to its YTM (10%), the bond's value will be equal to its par value, which is $1,000. This is because when the coupon rate equals the YTM, the present value of the bond's future cash flows (interest payments and principal repayment) equals its face value.

Tangshan Mining Company Has an Outstanding Issue of Convertible Bonds