price of the convertible, what is the convertible bonds price?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A company whose stock trades at $ 100 can
issue 10% coupon paying senior bonds for a
maturity of two year. Alternatively, they can
issue convertibles at 5% coupon with $ 1000
face value with a conversion ratio of 8. If the
option value constitutes one fourth of the
price of the convertible, what is the
convertible bonds price?
a. $ 1,217.63
p. $ 1,233.67
c. $ 844.43
d. $ 833.13
Transcribed Image Text:A company whose stock trades at $ 100 can issue 10% coupon paying senior bonds for a maturity of two year. Alternatively, they can issue convertibles at 5% coupon with $ 1000 face value with a conversion ratio of 8. If the option value constitutes one fourth of the price of the convertible, what is the convertible bonds price? a. $ 1,217.63 p. $ 1,233.67 c. $ 844.43 d. $ 833.13
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