A firm has an outstanding 15-year convertible bond issue with a $1,000 par value and a stated annual interest rate of 7 percent. The bond is convertible into 50 shares of common stock which has a current market price of $25. A straight bond could have been sold with a 10 percent stated interest rate. The straight value of the bond is
A) $1,328.
B) $1,250.
C) $1,000.
D) $771.

Question

Quizplus · Accepted Answer

The straight value of the bond is calculated by discounting the bond's cash flows at the market interest rate for a similar non-convertible bond. Here, the bond pays $70 annually for 15 years, and the market rate is 10%. The present value of these cash flows is approximately $771.

A Firm Has an Outstanding 15-Year Convertible Bond Issue with a $1,000