Macrostrategy (MS) is planning to issue convertible bonds to finance its CEO Michael Taylor’s gambling plan that includes multiple poker games with an initial capital of $1 billion. Company plans to issue bonds at par value of $1000 each with an option to convert bonds into stocks at maturity to make issuance attractive for investors. Current share price of MS is $50 and bonds will be issued with a 25% conversion premium and 4 years term. Bonds will pay semi-annual coupon with an annual coupon rate of 1%. MS has stock options available in the market and on the closing of 11/30/2021, option prices are listed below; 11/30/2021 Market Data (Share Price: $50) Option Type Exercise Price Last Trade Maturity Call $55 $3.25 05/31/2022 Call $58 $3.75 08/15/2022 Call $60 $4.10 11/15/2022 Annual risk free rate is 0.8% Calculate implied volatilities of the options listed above and use the average implied volatility in your option valuation. Calculate the option price with the 25% conversion premium and calculate the total value of the conversion option. Calculate annual yield of convertible bond.
Macrostrategy (MS) is planning to issue convertible bonds to finance its CEO Michael Taylor’s gambling plan that includes multiple poker games with an initial capital of $1 billion. Company plans to issue bonds at par value of $1000 each with an option to convert bonds into stocks at maturity to make issuance attractive for investors. Current share price of MS is $50 and bonds will be issued with a 25% conversion premium and 4 years term. Bonds will pay semi-annual coupon with an annual coupon rate of 1%. MS has stock options available in the market and on the closing of 11/30/2021, option prices are listed below; 11/30/2021 Market Data (Share Price: $50) Option Type Exercise Price Last Trade Maturity Call $55 $3.25 05/31/2022 Call $58 $3.75 08/15/2022 Call $60 $4.10 11/15/2022 Annual risk free rate is 0.8% Calculate implied volatilities of the options listed above and use the average implied volatility in your option valuation. Calculate the option price with the 25% conversion premium and calculate the total value of the conversion option. Calculate annual yield of convertible bond.
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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Macrostrategy (MS) is planning to issue convertible bonds to finance its CEO Michael Taylor’s gambling plan that includes multiple poker games with an initial capital of $1 billion. Company plans to issue bonds at par value of $1000 each with an option to convert bonds into stocks at maturity to make issuance attractive for investors. Current share price of MS is $50 and bonds will be issued with a 25% conversion premium and 4 years term. Bonds will pay semi-annual coupon with an annual coupon rate of 1%. MS has stock options available in the market and on the closing of 11/30/2021, option prices are listed below;
11/30/2021 Market Data (Share Price: $50)
Option Type Exercise Price Last Trade Maturity
Call $55 $3.25 05/31/2022
Call $58 $3.75 08/15/2022
Call $60 $4.10 11/15/2022
Annual risk free rate is 0.8%
- Calculate implied volatilities of the options listed above and use the average implied volatility in your option valuation.
- Calculate the option price with the 25% conversion premium and calculate the total value of the conversion option.
- Calculate annual yield of convertible bond.
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