Question

Issued $400,000 of its 20-year, 8% convertible bonds at 103% of face value. The market interest rate of similar kinds of non-convertible bonds is 10%. The bonds are convertible at the option of the holder at a conversion ratio of 25 shares per $1,000 bond. Interest is payable semiannually on June 30 and December 31.

a) Various financial calculations
b) Market interest rate
c) Conversion ratio
d) Issuing bonds

Answer 1

The company issued $400,000 of 8% convertible bonds at 103% of face value. The conversion ratio is 25 shares per $1,000 bond. The market interest rate is 10%.

Step-by-step explanation:

Various financial calculations:

1. Amount issued: $400,000 x 103% = $412,000
2. Coupon payment per year: $412,000 x 8% = $32,960
3. Conversion ratio: 25 shares per $1,000 bond
4. Market interest rate: 10%
5. Yield on the bond: ($1,080 - $964) / $964 = 12%
6. Issuing bonds: The company issued $400,000 of 8% convertible bonds at 103% of face value.

Conversion ratio refers to the number of shares of common stock that the bondholder can convert each bond into. In this case, the conversion ratio is 25 shares per $1,000 bond.

Market interest rate refers to the prevailing interest rate for similar non-convertible bonds in the market. In this case, the market interest rate is 10%.