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Calculate the value of Platinum Bhd bond

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Reference no: EM133124341

Question - Today is 31 December 21321. Adam & Co. has invested in RM1,000 par value convertible bonds from Platinum Bhd 4 years ago. The bond which will mature on 31 December 2026 pays 8% coupon semi-annually. However, it is stipulated in the agreement clause that the bond is callable at any time before the period of maturity ends. The prevailing market interest rate of similar bond is 2% above the coupon rate.

Required -

i. Calculate the value of Platinum Bhd bond if it is held until maturity.

ii. Explain whether Platinum Bhd should call the bond at the end of 2022 with three years call penalty on interest if the conversion value of the bond is estimated to be 10% higher than the value of straight bond in (a) above.

iii. Advise Platinum Bhd on the appropriate condition to make a callable bond.

iv. Explain the risks faced by Adam & Co. in association with investment in callable bond.

Reference no: EM133124341

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