Question

Straight Bond Value 14-1. Sean Thornton has invested in a convertible bond issued by Cohan Enterprises. The conversion ratio is 20 . The market price of Cohan common stock is $60 per share. The face value is $1,000. The coupon rate is 8 percent and the annual interest is paid until the maturity date 10 years from now. Similar, nonconvertible bonds are yielding 12 percent (YTM) in the marketplace. Calculate the straight bond value of this bond. Straight Bond Value 14-2. Use the same data given in problem 14-1. Now assume that interest is paid semiannually ( $40 every six months). Calculate the straight bond value. Conversion Value 14-3. Using the data in problem 14-1, calculate the conversion value of the Cohan Enterprises convertible bond.

Answer 1

The straight bond value of the convertible bond is $774.

To calculate the straight bond value of the convertible bond, we need to find the present value of its future cash flows which include the annual coupon payments and the face value at maturity.

Annual Coupon Payment = Face Value * Coupon Rate

= $1,000 * 0.08

= $80

The number of years until maturity is 10 years.

The yield to maturity (YTM) is 12 percent.

Present Value of Coupon Payments = Annual Coupon Payment * [(1 - (1 + YTM)^(-n)) / YTM]

= $80 * [(1 - (1 + 0.12)^(-10)) / 0.12]

= 452.017842

Present Value of Face Value = Face Value / (1 + YTM)^n

= $1,000 / (1 + 0.12)^10

= 321.973237

The Straight Bond Value is:

= Present Value of Coupon Payments + Present Value of Face Value

= 452.017842+321.973237

= 773.991079

= $774.