Given the follow information concerning a convertible Bond:
- Principal: $ 1000
- Maturity: 15 years
- Call Price: $1,050
- Conversion Price: $37(i.e, 27 shares)
- Market Price of the Common Stock: $32
- Market Price of the Bond: $1.040
a. What is current yield of this bond ?
b. What is the value of the Bond based upon the market price of the common stock ?
c. What is the value of the common stock based upon the market price of the bond ?
d. What is the premium in terms of stock that the investor pays when he or she purchases the convertible bond instead of the stock ?
e. Non-convertible bonds are selling at with a yield to maturity of 7 percent. If the this bond lacked a conversion feature, what would the approximate price of the bond be ?
f. What is the premium in terms of debt that the investor pays when he or she purchases the convertible bond instead of the non-convertible bond ?
g. What is the probability the corporation will call this bond ?
h. Why are investors willing to pay the premiums mentioned in questions d and f ?