Reference no: EM133021648
Question -
Q1: Why are derivatives considered to be riskier than other financial instruments?
Use the following information for the next four problems. Plunkett Gym Equipment, Inc., has a $1,000 convertible bond outstanding that can be converted into 25 shares of common stock. The common stock is currently selling for $34.75 a share, and the convertible bond is selling for $960. The bond has 20 years to maturity. The bond has a coupon rate of 8% and interest rates in the market for bonds of comparable quality are 9%.
1. What is the conversion value of the bond?
2. What is the conversion ratio of the bond?
3. What is the conversion premium?
4. What is the conversion price?
5. What is the pure bond value?
Use the following information for the next two problems. Hilgers Technology has a convertible bond outstanding, trading at $835. The par value is $1,000, the coupon rate is 9%, and the bond matures in 25 years. The conversion ratio is 20 and the company's common stock is selling for $41 per share.
6. What is the conversion value?
7. If similar bonds, which are not convertible, are currently yielding 12 percent, what is the pure bond value of this convertible bond?
8. The Rocky Scholes Swimwear's warrant is trading for $10.00. The warrant carries the option to purchase a half share of common stock for $50. What is the speculative premium if the stock price is $65?
Use the following information for the next two problems. Preston Toy Co. has warrants outstanding that allow the holder to purchase a share of stock for $22 (exercise price). The common stock is currently selling for $28, while the warrant is selling for $9.25 per share.
9. What is the intrinsic (minimum) value of this warrant?
10. What is the speculative premium on this warrant?
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