Bukit, Inc issued a convertible bond that pays 5% semi-annual coupon (Face value is $1,000). If you purchase this bond, you have an option to convert this bond into 20 shares of Sage’s common stock. Today, the convertible bond has 5 years to maturity and its YTM is 5%. The market price of Bukit’s common stock is $48 per share today. If the stock’s beta is 1.5 while the market risk premium is 8% and the risk-free rate is 2%, determine whether it is better for the convertible bond holders to convert their bonds today.
Bukit, Inc issued a convertible bond that pays 5% semi-annual coupon (Face value is $1,000). If you purchase this bond, you have an option to convert this bond into 20 shares of Sage’s common stock. Today, the convertible bond has 5 years to maturity and its YTM is 5%. The market price of Bukit’s common stock is $48 per share today. If the stock’s beta is 1.5 while the market risk premium is 8% and the risk-free rate is 2%, determine whether it is better for the convertible bond holders to convert their bonds today.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 16P
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Bukit, Inc issued a convertible bond that pays 5% semi-annual coupon (Face value is $1,000). If you purchase this bond, you have an option to convert this bond into 20 shares of Sage’s common stock. Today, the convertible bond has 5 years to maturity and its YTM is 5%. The market price of Bukit’s common stock is $48 per share today. If the stock’s beta is 1.5 while the market risk premium is 8% and the risk-free rate is 2%, determine whether it is better for the convertible bond holders to convert their bonds today.
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