Okay, let's solve this step-by-step:
Given:
Current market price of bond = $105 per $100 nominal value
Coupon rate = 6%
Bond matures in 3 years
Or bond can be converted to 10 shares per $100 bond
Current share price = $7.50
Expected annual share price increase = 8%
We need to find: Redemption value of the bond
Approach:
We calculate the redemption value for both options of holding the bond to maturity or converting to shares. The higher value will be the redemption value of the bond.
If held to maturity:
Face value at maturity = $100
Coupon payment per year = Face value x Coupon rate
= $100 x 0.06 = $6
Total coupons received over 3 years = 3 x $6 = $18
Redemption value = Face value + Total coupons
= $100 + $18 = $118
If converted to shares:
Shares received for $100 bond = 10 shares
Current total value of shares = 10 x $7.50 = $75
Value after 1 year at 8% growth = $75 x 1.08 = $81
Value after 2 years at 8% growth = $81 x 1.08 = $87.48
Value after 3 years at 8% growth = $87.48 x 1.08 = $94.47
Redemption value = $94.47
The redemption value if converted to shares is higher.
Therefore, the redemption value of the bond is $94.47
Hence, by showing the work, the redemption value is $94.47