Calculate the initial conversion price

Reference no: EM132208246

Question - Use the following information about a convertible bond offering and the underlying stock for QUESTIONS 1-5.

Bond circular information:

Issue Date: 1 January 2017.

Maturity: 1 January 2022 (5 years).

Interest: 4.5% annual coupon with first payment on 1 January 2018.

Issue Price: 100% of par with face value of $100,000.

Conversion period: Any time after 1 February 2017.

Conversion ratio: Each bond of par value of $100,000 is convertible into 5,000 ordinary shares

Market Information:

Share price issue date: $15

Annual dividend per share: $0.50

Convertible bond price 2 January 2018: $120,000

Share price on 1 January 2018: $22

1: Calculate the initial conversion price.

2: Calculate the premium payback period on the date the bond was issued.

Assume a flat yield curve of 2.5% on 1 January 2018 for questions 3, 4, & 5.

3: Calculate the straight value on 1 January 2018.

4: Calculate the convertible's conversion value on 1 January 2018.

5: Calculate the convertible's minimum value on 1 January 2018.

6: Another convertible bond trades for $750 (par is $1,000). Its conversion ratio is 50 and the current stock price is $18. Calculate the arbitrage profit available per 1 convertible bond.

Reference no: EM132208246

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