Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10% annual coupon interest rate and a 20-year maturity. The interest rate on a straight bond of similar risk is currently 12%. a. Calculate the straight bond value of the bond. b. Calculate the conversion (or stock) value of the bond when the market price of the common stock is $15, $20, $23, $30, and $45 per share. c. For each of the stock prices given in part b, at what price would you expect the bond to sell? Why?
Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10% annual coupon interest rate and a 20-year maturity. The interest rate on a straight bond of similar risk is currently 12%. a. Calculate the straight bond value of the bond. b. Calculate the conversion (or stock) value of the bond when the market price of the common stock is $15, $20, $23, $30, and $45 per share. c. For each of the stock prices given in part b, at what price would you expect the bond to sell? Why?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Eastern Clock Company has an outstanding issue of
convertible bonds with a $1,000 par value. These
bonds are convertible into 50 shares of common
stock. They have a 10% annual coupon interest rate
and a 20-year maturity. The interest rate on a straight
bond of similar risk is currently 12%.
a. Calculate the straight bond value of the bond.
b. Calculate the conversion (or stock) value of the
bond when the market price of the common stock is
$15, $20, $23, $30, and $45 per share.
c. For each of the stock prices given in part b, at what
price would you expect the bond to sell? Why?
d. What is the least you would expect the bond to sell
for, regardless of the common stock price behavior?
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