Question

I Need help with this

1. A convertible bond has the following terms: Principal of $1000, coupon interest of 7%, maturity in 10 years, callable after five years at 1070. The conversion price is $40 (25 shares). The current price of the common stock is $4 Similar risk bonds have a yield to maturity of 8%. Would it make sense to convert the bond today, not convert it, or wait a while to decide whether to convert? Why (you should use some numbers in your answer)?

2. How are convertible bonds different from put bonds? Which bond would make more sense, from an investor’s viewpoint, in a low interest rate environment? Why?

Answer 1

Considering that the investor Decides to convert the bond Today into shares:

No. of shares to to be received = 25 Shares.

Price of The Shares =$4

Now Value of the shares = $4*25=$100.

Considering such a low value of the shares it is advisable that the investor should not convert the bond to shares today.

Now given that the market yield of similar kinds of bond is 8%. Let us find out YTM of the given bond, assuming it is called in 5 Years Time.

	Coupon Every Year ('C)	70
	Future Value (F)	1070
	Price Today (P)	1000
	No. of Years	5
YTM =	C+{(F)-(P)}/N	84
	{(F)+(P)}/N	414
	Therefore YTM	20.29%

Calculation of the above

Therefore the same is higher than the YTM's of bond currently available in Market.

  Note:- For the other question please ask the same via different post.