A convertible bond can be converted into 1 share of stock. The bond is zero-coupon, i.e., it pays no interest, but matures to a value of $100 in two periods. The stock price is currently $100. In each period the stock can increase in each period by a factor of 1.4, or fall by a factor of 0.8. Each period the stock pays a dividend of 5%, at which point it can be converted. The risk-free rate is 10% and time to maturity is 2-years. Find the price at which the convertible bond can be issued
A convertible bond can be converted into 1 share of stock. The bond is zero-coupon, i.e., it pays no interest, but matures to a value of $100 in two periods. The stock price is currently $100. In each period the stock can increase in each period by a factor of 1.4, or fall by a factor of 0.8. Each period the stock pays a dividend of 5%, at which point it can be converted. The risk-free rate is 10% and time to maturity is 2-years. Find the price at which the convertible bond can be issued
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A convertible bond can be converted into 1 share of stock. The bond is zero-coupon, i.e., it pays no interest, but matures to a value of $100 in two periods. The stock price is currently $100. In each period the stock can increase in each period by a factor of 1.4, or fall by a factor of 0.8. Each period the stock pays a dividend of 5%, at which point it can be converted. The risk-free rate is 10% and time to maturity is 2-years. Find the price at which the convertible bond can be issued
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