(12 pts.) 5. A firm has just issued a 30-year callable, convertible bond with a coupon rate of 5 percent. The bond makes

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12 Pts 5 A Firm Has Just Issued A 30 Year Callable Convertible Bond With A Coupon Rate Of 5 Percent The Bond Makes 1 (63.75 KiB) Viewed 245 times

(12 pts.) 5. A firm has just issued a 30-year callable, convertible bond with a coupon rate of 5 percent. The bond makes semi-annual coupon payments. The par value of the bond is $1,000. The bond has a conversion price of $50. The company's stock is currently selling for $30 per share. The owner of the bond will be forced to convert if the bond's conversion value is ever greater than or equal to $1,300. The required return on an otherwise identical nonconvertible bond is 7 percent. a) Find the current conversion value and the value of the straight bond (i.e., value of the bond without the call options). What is the value of the convertible bond? b) If the stock price were to grow by 8 percent per year forever, how long would it take for the bond's conversion value to exceed $1,300? c) Assume that the stock price has grown at 8% a year as expected and the bond is converted when the conversion value is 1,300. What value would you assign to this bond?