What would be the price of this convertible bond

Assignment Help Financial Management

Reference no: EM131354327

Firm A just issued a convertible bond which bondholders can convert their bond into firm’s common stocks right after the second year. This bond is 7-year, 6 percent coupon bond with $1,000 face value. The current interest rate is 7% and the stock price is $10 per share. The future interest rate at t=2 can be either 10% (with 60% chance) or 5% (40% chance). Also, the future stock price at t=2 can be either $40 or $19 with the equal probability (50% each). The conversion ratio is 25. Coupon is paid annually. What would be the price of this convertible bond?

Reference no: EM131354327

Questions Cloud

Positions in options in order to achieve payoffs : Suppose you take a position in options that guarantees you the following payoffs (excluding price/premia of the options): Payoff = zero if underlying asset is less than or equal to $18 at maturity date Payoff = asset price minus $18 if asset price gr..

Quoted today should be equal to the spot rate in the future : Most major countries in the world have agreed on fixed exchange rates in order to facilitate international trade. The forward exchange rate quoted today should be equal to the spot rate in the future.

Should taxes be raised on capital gains : A current hot topic is whether Amazon.com and similar business should be required to collect state income and use taxes on sales. What issues do you see with respect to proposals to impose such taxes and do you believe Congress should all states to t..

What is the new value of your margin account : suppose that you buy a eurodollar contract for $99.25 and have an initial margin of $1.00 and contract price falls to $99.15. what is the new value of your margin account( after the gain or loss)?

What would be the price of this convertible bond : Firm A just issued a convertible bond which bondholders can convert their bond into firm’s common stocks right after the second year. This bond is 7-year, 6 percent coupon bond with $1,000 face value. The conversion ratio is 25. Coupon is paid annual..

Both bonds have the same yield : Exactly four years ago, AAA Corporation issued 20-year bonds with a $1,000 face value. These bonds pay $65 in coupon payment every six months. The bonds currently sell for $1,020. If both bonds have the same yield (market interest rate), how many ne..

What is the annualized yield to maturity of the bond : Bounty Inc. has outstanding a fixed coupon, $1,000 par value bond with 15 years remaining until maturity. The bond makes semi-annual coupon payments and the annual coupon rate is 7 percent. If the bond currently sells at a price of $825 per bond, wha..

The interest rate and the price of this callable bond : Suppose an 8% coupon, 30 year bond but this bond is callable in 10 years at a call price of $1,100. What is the Yield to Call? What is the relation between the interest rate and the price of this callable bond?

Compute the amortization of premium : Compute the amortization of premium in the 17th payment for a 1000 par value 20 -year bond with semi-annually coupons of 60 and a yield of 10% compounded semi-annually.

User Account

All Pages