(SOLVED) October Industries has a convertible bond outstanding. The bonds have a par value of $1,000 and currently trade in the marketplace at $880.
October Industries has a convertible bond outstanding. The bonds have a par value of $1,000 and currently trade in the marketplace at $880. The bonds bear a coupon rate of 7% and mature in 20 years. The conversion price is $40 and the company’s common stock is currently selling for $32 per share. Interest is paid annually.
- What is the conversion value of the bond?
- Similar bonds, without the conversion feature, are currently yielding 10%. What is the pure bond value of October Industries convertible bond?
- What is the conversion premium of the bond?
- If the market value of October Industries shares were to increase to $44 and the conversion premium were to stay the same, what would be the market price of the bonds?
Expert Solution Preview
Conversion price = $40
Face value of bond = $1000
Number of shares converted into from bond or conversion ratio= Face value of bond/Conversion price
It means 1 bond will be converted into 25 shares
Price per share=$32
Conversion value of bond = Coversion ratio * Price per share
So conversion value of bond is $800