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Your Client is Interested in the Discovery Cafe 14.875% bond maturing October 28, 2026. The bond...

Your Client is Interested in the Discovery Cafe 14.875% bond maturing October 28, 2026. The bond is callable October 28, 2020 at a call premium of 11.000%. The bond is also convertible at $500/share. The common share is trading at $558.50 and the prevailing yield is 5.750%

You buy the bond to settle October 28, 2015

The most you would pay for a $1000 bond if you knew that the bond would go to maturity is $  

The most you would pay for a $1,000 bond if you knew that the bond would be called is $  

The conversion value of the bond is $  

The most you would pay for a $1000 bond is $  

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Answer #1

Given :

Coupon Rate : 14.875%

Yield : 5.750%

Maturity Date : 28.10.2026 (11 years from investment date)

Callable Date : 28.10.2020 (5 years from investment date)

Investment Date : 28.10.2015

Value we would pay if the bond is expected to go to maturity :

Present value of bond :

Year Ending 28.10.**** Cash Inflow Discounting factor @ 5.750% Present Value
2016 148.75 0.9456 140.6619
2017 148.75 0.8942 133.0137
2018 148.75 0.8456 125.7812
2019 148.75 0.7996 118.9421
2020 148.75 0.7561 112.4748
2021 148.75 0.7150 106.3591
2022 148.75 0.6761 100.5760
2023 148.75 0.6394 95.1073
2024 148.75 0.6046 89.9360
2025 148.75 0.5717 85.0459
2026 148.75 0.5406 80.4216
2026 1000 0.5406 540.6496
Present Value as on 28.10.2015 1728.9692

The most we would pay if the bond is expected to go to maturity is $1728.97.

Value we would pay if the bond is expected to be called on 28.10.2020 @ premium of 11% :

Year Ending 28.10.**** Cash Inflow Discounting factor @ 5.750% Present Value
2016 148.75 0.9456 140.6619385
2017 148.75 0.8942 133.0136535
2018 148.75 0.8456 125.7812326
2019 148.75 0.7996 118.9420639
2020 148.75 0.7561 112.4747649
2020 1110 0.7561 839.3074895
Present Value as on 28.10.2015 1470.181143

The most we would pay if the bond is expected to be called on 28.10.2020 is $1470.18.

The conversion value of the bond is $500/share.

The most we would pay for a $1000 bond (assuming we're buying with the intention for redemption on maturity) is $ 1728.97.

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