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Delta Solutions issue a 10 year convertible bond with a 9% coupon paid annually. These bonds...

Delta Solutions issue a 10 year convertible bond with a 9% coupon paid annually. These bonds convert into common shares at a rate of 40 per $1000 of debt. Straight bonds of similar risk yield 8%. The stock price is currently 40% less than the conversion price, but the stock is expected to growth at 10 per cent annually into the foreseeable future. The bond is callable at $1 200 but will not be called until their price is 125% of the conversion value.

What is the conversion price of these bonds (rounded)?

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Answer #1

face value of bond = $1000

conversion ratio = 40 per 1000 bond

Conversion price of bonds = Face value of bond/conversion price

=1000/40

=$25

So conversion price of bonds is $25

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