bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bond value, she decided to apply the valuation techniques she learned in her finance course. To Do a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie let the bond be called away from her or should she convert it into common stock? b. For each of the following required returns, calculate the bond's value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or at par value. (1) Required return is 6.0%. (2) Required return is 8.0%. (3) Required return is 10.0%.
bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate. Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these factors on the bond value, she decided to apply the valuation techniques she learned in her finance course. To Do a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie let the bond be called away from her or should she convert it into common stock? b. For each of the following required returns, calculate the bond's value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or at par value. (1) Required return is 6.0%. (2) Required return is 8.0%. (3) Required return is 10.0%.
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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Transcribed Image Text:bonds were issued 5 years ago at their $1,000 par value and have exactly 25 years remaining until they mature. They have an 8.0% coupon interest rate, are
convertible into 50 shares of common stock, and can be called any time at $1,080.00. The bond is rated Aa by Moody's. Atilier Industries, a manufacturer of sporting
goods, recently acquired a small athletic-wear company that was in financial distress. As a result of the acquisition, Moody's and other rating agencies are considering
a rating change for Atilier bonds. Recent economic data suggest that expected inflation, currently at 5.0% annually, is likely to increase to a 6.0% annual rate.
Annie remains interested in the Atilier bond but is concerned about inflation, a potential rating change, and maturity risk. To get a feel for the potential impact of these
factors on the bond value, she decided to apply the valuation techniques she learned in her finance course.
To Do
a. If the price of the common stock into which the bond is convertible rises to $30.00 per share after 5 years and the issuer calls the bonds at $1,080.00, should Annie
let the bond be called away from her or should she convert it into common stock?
b. For each of the following required returns, calculate the bond's value, assuming annual interest. Indicate whether the bond will sell at a discount, at a premium, or
at par value.
(1) Required return is 6.0%.
(2) Required return is 8.0%.
(3) Required return is 10.0%.
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