Suppose a company simultaneously issues $50 million of convertible bonds with a couponrate of 9% and $50 million of nonconvertible bonds with a coupon rate of 12%. Bothbonds have the same maturity. Because the convertible issue has the lower coupon rate, isit less risky than the nonconvertible bond? Would you regard the cost of capital as beinglower on the convertible than on the nonconvertible bond? Explain. (Hint: Althoughit might appear at first glance that the convertible’s cost of capital is lower, this is notnecessarily the case, because the interest rate on the convertible understates its true cost.Think about this.)

Suppose a company simultaneously issues $50 million of convertible bonds with a couponrate of 9% and $50 million of nonconvertible bonds with a coupon rate of 12%. Bothbonds have the same maturity. Because the convertible issue has the lower coupon rate, isit less risky than the nonconvertible bond? Would you regard the cost of capital as beinglower on the convertible than on the nonconvertible bond? Explain. (Hint: Althoughit might appear at first glance that the convertible’s cost of capital is lower, this is notnecessarily the case, because the interest rate on the convertible understates its true cost.Think about this.)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter20: Hybrid Financing: Preferred Stock, Warrants, And Convertibles

Section: Chapter Questions

Problem 7Q

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Suppose a company simultaneously issues $50 million of convertiblebonds with a coupon rate of 10% and $50 million of straight bonds with acoupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that it is less risky than the straightbond? Is the cost of capital lower on the convertible than on the straightbond? Explain.
Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of10% and $50 million of straight bonds with a coupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that it is less risky than the straight bond? Is the cost of capital lower on the convertible than on the straight bond? Explain. If the project's cost of capital is 12%, should the machine be purchased?
Which of these five statement is the most correct and why ? a. Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. b. Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. c. Reinvestment rate risk is worse from a typical investor's standpoint than interest rate risk. d. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium over its R1 000 par value. e. If a 10-year, R1 000 par, zero coupon bond were issued at a price which gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a discount below its R1 000 par value.
Consider a convertible bond as follows: par value = $1,000, coupon rate = 8.00%, market price of convertible bond = $1,100, conversion ratio = 18, straight value of bond = $600, yield to maturity of straight bond = 10%, current price of common stock = $45, dividend per share = $3.00/year. A. What is the favorable income differential per bond (not per share)? B. At what stock price, the realized return from investing in the convertible bond becomes zero? In other words, what is the break-even stock price?
The following data apply to Saunders Corporation's convertible bonds: Maturity: 10 Stock Price: $30.00 Par value: $1,000.00 Conversion price: $35.00 Annual coupon: 5.00% Straight-debt yield: 8.00% What is the bond's straight-debt value? Based on your answers to the three preceding questions, what is the minimum price (or "floor" price) at which the Saunders' bonds should sell? Please solve the problem by using algebra and formulas instead of excel.
Which of the following observations is the most accurate? 34.A callable bond will have a lower required rate of return than a noncallable bond, assuming all other factors remain stable.b. If all other factors were equal, a company would choose to issue noncallable bonds over callable bonds.c. From the perspective of a traditional investor, reinvestment rate risk is higher than interest rate risk.d. If a 10-year, $1,000 par, zero coupon bond was sold at a price that offered buyers a 10% rate of return, and interest rates fell to the point where kd = YTM = 5%, we might be certain that the bond would sell for more than its $1,000 par value.e. If a 10-year, $1,000 par, zero coupon bond was sold at a price that provided borrowers with a 10% rate of return, and interest rates subsequently fell to the point where kd = YTM = 5%, we might be certain that the bond would sell at a discount below its $1,000 par value.
You are an investment manager evaluating two corporate bonds, each with a maturity value of $100,000. Each bond matures in exactly 10 years and each bond has a yield-to-maturity (YTM) of 5%. Bond 1 pays a coupon of 8% and Bond 2 pays a coupon of 3%. Without doing any math, which bond trades at a higher price? Which bond is more sensitive to changes in interest rates? If both bonds have the identical maturity date and YTM, then why do they trade at different prices? Is this a violation of The Law of One Price ? If you buy Bond 1, what is the NPV of the cash flows?
Please dont answer in excel i dont understand that yet. Given the following information concerning a convertible bond: Principle: $1,000 Coupons: 5 percent Maturity: 15 years Call Price: $1,050 Conversion price: $37 (i.e., 27 shares) Market Price of the Bond: $1040 Common stock $30 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. Nonconvertible bonds are selling with a yield to maturity of 7 percent If this bond lacked the 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 a nonconvertible bond?
please dont put in excel i dont understand that yet Given the following information concerning a convertible bond: Principle: $1,000 Coupons: 5 percent Maturity: 15 years Call Price: $1,050 Conversion price: $37 (i.e., 27 shares) Market Price of the Bond: $1040 Common stock: $30 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? (I already have an answer for D) E.Nonconvertible bonds are selling with a yield to maturity of 7 percent If this bond lacked the 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 a nonconvertible bond? G.What is the probability that the corporation will call this bond? H.Why are investors willing to pay the premiums mentioned in questions d and f?
General Matter’s outstanding bond issue has a coupon rate of 9.2%, and it sells at a yield to maturity of 7.60%. The firm wishes to issue additional bonds to the public. What coupon rate must the new bonds offer in order to sell at face value?
Assume you make the following investments: A $10,000 investment in a 10-year T-bond that yields 6.00%, and a $20,000 investment in a 10-year corporate bond with an BBB rating and a yield of 8.30%. Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.50%, what is your estimate of the corporate bond's default risk premium? A.) 2.30%? B.) 3.06%? C.) 1.80%? D.) 2.52%?
(Please answer in an equation rather than excel, i dont know excel yet) Given the following information concerning a convertible bond: Principle: $1,000 Coupons: 5 percent Maturity: 15 years Call Price: $1,050 Conversion price: $37 (i.e., 27 shares) Market Price of the Bond: $1040 Common stock $30 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. Nonconvertible bonds are selling with a yield to maturity of 7 percent If this bond lacked the 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 a nonconvertible bond?