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Determining the bond price

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Reference no: EM133070714

There is an investment opportunity that will pay you $5 each quarter for fifteen years. The investment has a beta risk of 0.8. The annual market risk premium and risk-free interest rate are 8% and 2%, respectively. [hint: the rate you compute using the CAPM is in an EAR]

(a) If I am selling a security based on such an investment opportunity (that is, it has the same benefit and risk as the above investment opportunity), how much are you willing to pay?

(b) Suppose there is a fifteen-year bond that pays 3% coupon per year (on a semi-annual basis) and with a face value of $1000. The bond has beta risk of 0.2. What should be the bond price?

c) If I allow you to convert the bond into my security, what should be the term of conversion? (i.e. how many bonds for each shares of my security?)

Reference no: EM133070714

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