Exam 16: Convertible Bonds and Convertible Preferred Stock

Generally a convertible bond lacks

Buying a bond with an option to sell the bond back to the firm at par is more speculative than buying a bond that lacks this feature.

Given the information below, answer the following questions.    A convertible bond has the following features:      Principal            $1,000      Maturity date            20 years      Interest                $80 (8% coupon)      Call price           $1,050      Exercise price          $65 a share a. The bond may be converted into how many shares?    b. If comparable non-convertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt? c. If the stock were selling for $52, what is the value of the bond in terms of stock? d. Would you expect the bond to sell for its value as debt (i.e., the value determined in b)if the price of the stock were $52? e. If the price of the bond were $960, what are the premiums paid over the bond's value as stock and its value as debt? f. If the price of the stock were $35, what would be the minimum price of the bond? g. What is the probability that the bond will be called when the price of the stock is $52?    h. If the price of the stock rose to $73, what would happen to the price of the bond? i. If the price of the stock were $73, what would the investor receive if the bond were called? j. What will the investor receive when the bond matures?

Convertible bonds are often subordinated to the firm's other debt.

The interest paid by a convertible bond tends 1. to exceed the firm's common stock dividends 2. to be less than the firm's common stock dividends 3. over time to offset the premium paid for the bond 4. to increase the premium paid for the bond

Convertible bonds tend to pay more interest than comparable non-convertible bonds.

A firm has both a convertible bond and a convertible preferred stock outstanding. The convertible bond has the following features:       Coupon         6.5%       Maturity date   10 years       Exercise price $20       Principal   $1,000       Call price  $1,065 ​ The convertible preferred stock has the following features:       Annual dividend    $2.25       Convertible into 2.5 shares of common stock       Callable at $25 a share ​ Currently the common stock is selling for $13; the yield on non-convertible bonds is 10%, and the yield on comparable preferred stocks is 14%. What is the value of the above securities in terms of the common stock? What would be the value of each security if it lacked the conversion feature?