Adequate information: Par Value - $1000 Current market price of convertible bond - $980 Conversion ratio - 25 Expected market price of convertible bond - $1125 Coupon rate - 4% Current market price of equity - $35 Expected market price of equity - $45 Requirement 1: To calculate current market conversion price for Ytel convertible bond. Introduction: Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Conclusion

Thus the current market conversion price is $39.20.

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.

Conclusion

Thus the straight bond value should decrease and option value should increase with an increase in bond yield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

Article: Current Bank Problem Statement The general problem to be surveyed is that leaders lack an understanding of how to address job demands, resulting in an increase in voluntary termination, counterproductive workplace outcomes, and a loss of customers. Bank leaders discovered from customer surveys that customers are closing accounts because their rates are not competitive with area credit unions. Job demands such as a heavy workload interfered with employee performance, leading to decreased job performance. Healthcare employees who felt the organization’s benefits were not competitive were more likely to quit without notice, resulting in retention issues for the organization. Information technology leaders who provide job resources to offset job demand have seen an increase in (a) new accounts, (b) employee productivity, (c) positive workplace culture, and (d) employee retention. The specific problem to be addressed is that IT technology leaders in the information technology…

How to rewrite the problem statement, correcting the identified errors of the Business Problem Information and the current Bank Problem Statement (for the discussion: Evaluating a Problem Statement)

Don't used hand raiting and don't used Ai solution

Answer 2

Question

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Conclusion

Thus the current market conversion price is $39.20.

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.

Conclusion

Thus the straight bond value should decrease and option value should increase with an increase in bond yield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Conclusion

Thus the current market conversion price is $39.20.

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.

Conclusion

Thus the straight bond value should decrease and option value should increase with an increase in bond yield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Conclusion

Thus the current market conversion price is $39.20.

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.

Conclusion

Thus the straight bond value should decrease and option value should increase with an increase in bond yield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Conclusion

Thus the current market conversion price is $39.20.

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.

Conclusion

Thus the straight bond value should decrease and option value should increase with an increase in bond yield.

Answer 6

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Conclusion

Thus the current market conversion price is $39.20.

Answer 7

Chapter 15, Problem 5CP

A(i)

Summary Introduction

Adequate information:

Par Value - $1000

Current market price of convertible bond - $980

Conversion ratio - 25

Expected market price of convertible bond - $1125

Coupon rate - 4%

Current market price of equity - $35

Expected market price of equity - $45

Requirement 1:

To calculate current market conversion price for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

Answer 8

A(i)

Expert Solution

Explanation of Solution

Computation of current market conversion price

Current market conversion price = Current market price of convertible bond / Conversion ratio

= $980/25

= $39.20

Answer 9

A(i)

Expert Solution

Answer 10

A(i)

Expert Solution

Answer 11

Expert Solution

Answer 12

Conclusion

Thus the current market conversion price is $39.20.

Answer 13

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

Answer 14

A(ii)

Summary Introduction

Requirement 2:

To calculate expected one-year rate of return for Ytel convertible bond.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security. It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a time period, expressed as a proportion of investment made in beginning.

Answer 15

A(ii)

Expert Solution

Explanation of Solution

Calculation of rate of return for Ytel convertible bond

Rate of return for convertible bond = Expected market price in one year + Coupon price _________________________________________ -1 Current market price of bond = $1125 +( 0.04×$1000 ) _________________ -1 $980 =0.188 or 18.8%

Answer 16

A(ii)

Expert Solution

Answer 17

A(ii)

Expert Solution

Answer 18

Expert Solution

Answer 19

Conclusion

Thus, the rate of return for Ytel convertible bond is 18%.

Answer 20

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

Answer 21

A(iii)

Summary Introduction

Requirement 3:

To calculate expected one-year rate of return for Ytel common equity.

Introduction:

Market conversion price of bond is the effective price when the investor exercises conversion option to purchase common stock in the form of convertible security.It is calculated by dividing convertible bond market price by convertible bond conversion ratio

Expected rate of return is the profit made on investment over a period of time,expressed as a proportion of investment made in beginning.

Answer 22

A(iii)

Expert Solution

Explanation of Solution

Calculation of expected rate of return for Ytel common equity.

Rate of return for common equity = Expected market price in one year + Dividend ______________________________________ -1 Current market price of common equity = $45 +0 _______ -1 $35 =0.285 or 28.5%

Answer 23

A(iii)

Expert Solution

Answer 24

A(iii)

Expert Solution

Answer 25

Expert Solution

Answer 26

Conclusion

Thus, the rate of return for Ytel common equity is 28.5%.

Answer 27

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

Answer 28

B(i)

Summary Introduction

Adequate information:

Par Value - $1000

Conversion ratio - 25

Increased Common equity price- $51

Requirement 1:

To determine effect of each component of convertible bond's value on increase in Ytel's common equity price.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

Answer 29

B(i)

Expert Solution

Explanation of Solution

If the common equity price increases, the straight bond value should remain the same and the Option value of the bond should increase. The option value component increases and it becomes "deep in the money" because the price of the equity price is higher ($51 per share) than the bond's contract price ($1000/25= $40 per share)

Answer 30

B(i)

Expert Solution

Answer 31

B(i)

Expert Solution

Answer 32

Expert Solution

Answer 33

Conclusion

Thus the straight bond value should remain unchanged and option value should increase with an increase in common equity price.

Answer 34

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.

Conclusion

Thus the straight bond value should decrease and option value should increase with an increase in bond yield.

Answer 35

B(ii)

Summary Introduction

Requirement 2:

To determine effect of each component of convertible bond's value on increase in Ytel's bond yield.

Introduction:

The conversion value of bond is equal to the value if the bond is converted into stock immediately. Also, an increase in stock price volatility increases the bond price which means if the stock price are volatile, the conversion option on stock is more valuable.

The two components of convertible bond's value are:

1.Straight bond value- In this, increase in interest rates decreases the straight value component of the convertible bond.

2.Option Value- In this, an increase in interest rates increases value of equity call option.

Answer 36

B(ii)

Expert Solution

Explanation of Solution

If the Ytel's bond yield increases, the straight bond value should decrease and option value should increase. This is because bond value declines when bond yield increases and call option increases when bond yield increases though this increase may be small as compared to change in option value as a result of increase in equity price.