(SOLVED) October Industries has a convertible bond outstanding. The bonds have a par value of \$1,000 and currently trade in the marketplace at \$880.

Discipline: Finance

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 1-2)

Paper Format: APA

Pages: 1 Words: 184

Question

October Industries has a convertible bond outstanding. The bonds have a par value of \$1,000 and currently trade in the marketplace at \$880. The bonds bear a coupon rate of 7% and mature in 20 years. The conversion price is \$40 and the company’s common stock is currently selling for \$32 per share. Interest is paid annually.

1. What is the conversion value of the bond?
1. Similar bonds, without the conversion feature, are currently yielding 10%. What is the pure bond value of October Industries convertible bond?
1. What is the conversion premium of the bond?
1. If the market value of October Industries shares were to increase to \$44 and the conversion premium were to stay the same, what would be the market price of the bonds?

Expert Solution Preview

a

Conversion price = \$40

Face value of bond = \$1000

Number of shares converted into from bond or conversion ratio= Face value of bond/Conversion price

=1000/40

=25

It means 1 bond will be converted into 25 shares

Price per share=\$32

Conversion value of bond = Coversion ratio * Price per share

=25*32

=800

So conversion value of bond is \$800

b....