Suppose you just bought a convertible bond at itspar value. Your broker gives you information onthe bond’s conversion ratio, coupon rate, maturity, years of call protection, and the yield on nonconvertible bonds of similar risk and maturity.The company has a well-established payout ratio,and you also know the stock’s price, beta, andexpected ROE. You also know the risk-free rate andthe market risk premium.a. How could you use this information to determine how much you are paying for the optionto convert?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Suppose you just bought a convertible bond at its
par value. Your broker gives you information on
the bond’s conversion ratio, coupon rate, maturity, years of call protection, and the yield on nonconvertible bonds of similar risk and maturity.
The company has a well-established payout ratio,
and you also know the stock’s price, beta, and
expected
the market risk premium.
a. How could you use this information to determine how much you are paying for the option
to convert?
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