CFIN
6th Edition
ISBN: 9780357144039
Author: BESLEY
Publisher: CENGAGE L
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 6, Problem 3PROB
Summary Introduction
The convertible bonds have a face value of $1,000 which can be converted into 50 common shares. Current price of the stock is $19, and bond is $980.
Convertible bonds or debenture is a type of bond which has the option of converting the bonds to common shares. Each share price or the conversion price is determined by the face
When, the market price of the stock is more than the conversion price, then the bondholders can sell the stock and gain from the difference in price.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You own a convertible corporate bond that has a par value of R1000. You are considering exercising the embedded option, which has a conversion price of 106. If the firm's share price is currently 180.23, what is the conversion value of your bond?Provide your answer in Rands (R), correct to TWO decimal places. However, do not write the sign (R) only write down the value and do not leave any spaces between numbers.
Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%.
(a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55.
(b) Is there any advantage to investing in the stock or the forward contract? Why?
(c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same.
Now is there any advantage to investing in the stock or the forward contract?
Why?
Suppose you are a seller . At time t = 0 you get £C from the buyer where C is the risk-neutral price of the option. You then have to design a hedging strategy which would allow you to meet your financial obligation in one year’s time. Your portfolio should consist of two investments: you are allowed to buy the underlying shares and to deposit money in the bank.
The price of the share evolves according to a geometric Brownian motion. State the formulae you will need to compute the number of shares in the portfolio and the capital deposited in the bank at any time t, 0 ≤ t ≤ 1.
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Say you then decide to sell 1 call option on Company A through your account, but your account will only let you do this if you already own the stock (a “covered call”), so you buy 500 shares of Company A and then proceed to sell a call option on Company A. Say this short call option expires in-the-money. What does in-the-money mean in this context? I'm pretty confused about this.arrow_forwardAn investor sells a European Put on a share for $4. The stock price is $47 and the strike price is $50. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investor's profit with the stock price at the maturity of the option.arrow_forward1. Suppose you purchase bond that has a coupon of $75, face value of S1,000, and current price of $1,100. What is your coupon rate? What is your current Save Answer yield? 2. Suppose you purchase a bond with a coupon of $50 for $1,010. You sell it one year later for $900. What rate of return did you carn?arrow_forward
- Suppose that an investor buys a 100-share put option for $150. It has an exercise price of $38 and the underlying price per share of the stock at expiration is $39. What is the investor's amount of profit or loss, ignoring brokerage fees? and A firm is in need of $2 million in new long-term financing. The firm is trying to decide whether to sell common stock or a convertible bond. The market price of the common stock at present is $42 per share. In order to sell this new issue, the stock has to be underpriced by $2 and sold for $40 per share. Currently the firm has 300,000 shares of common stock outstanding. The firm could also issue 20-year, 10 percent, and $1,000 par-value convertible bonds. They would set the conversion price at $50 per share, and the bond could be sold at par. The earnings for the firm should be $500,000 in the coming year. If the firm chooses the sale of common stock, what will the earnings per share in the coming year be?arrow_forwardYou sold a put contract on EDF stock at an option price of $.25 and an exercise price of $22.50. The option expires today when EDF stock is selling for $21.70 a share. Ignoring transactions costs and taxes, what is your total profit on this investment?arrow_forwardSuppose you invest in a municipal bond that pays a yield of 149%. If your marginal tax is 15%, what is the equivalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places) A Moving to another question will save this response. «» DELLarrow_forward
- 6 Consider a stock that is worth $50. A European put and a European call on this stock have an exercise strike price of $50 and expire in one year. The call costs $5 and the put costs $4. A risk-free bond will pay $50 in one year and costs $45. Is there an arbitrage opportunity? If so, state what transactions you would make and the present value of how much profit you would earn at expiration.arrow_forwardRefer to the stock options on Microsoft in the Figure 2.10. Suppose you buy a November expiration call option on 100 shares with the excise price of $140. Required: a-1. If the stock price at option expiration is $144, will you exercise your call?a-2. What is the net profit/loss on your position? (Input the amount as a positive value.)a-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) b-1. Would you exercise the call if you had bought the November call with the exercise price $135?b-2. What is the net profit/loss on your position? (Input the amount as a positive value.)b-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)c-1. What if you had bought the November put with exercise price $140 instead? Would you exercise the put at a stock price of $140?c-2. What is the rate of return on your position? (Negative…arrow_forwardSuppose you have an option to buy a share of ABC Corp stock for $100. The option expires tomorrow, and the current price of ABC Corp is $95. How much is your option worth?arrow_forward
- suppose you purchase a bond with a coupon of $50 for $1010 you sell it one year later for $900 What rate of return did you earn?arrow_forwardLet's say I decide to sell 1 call option through an account, but this account will only let me do this if you I already own the stock (a “covered call”), so I buy 500 shares of Company A and then proceed to sell a call option on Company Say this short call option expires in-the-money. What does in-the-money mean in this context? What will I have to do as the seller of this call option if the option expires in-the-money? And what about if it expires out-of-the-money?arrow_forwardSuppose that a European call option to buy a share for $ 90.00 costs a . Under what circumstances will the SELLER of the option make a profit ? \$4.00 and is held until maturity . ( DRAW the GRAPH to show ALL answers ) b . when will the option be exercised ( at what price , show on graph ) ? c . What is the Maximum profit for SELLER and at what stock price ? d . What is the Maximum loss for SELLER and at what stock price ? e . What will be profit / loss for SELLER if St is 150 ?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Bonds 101 (DETAILED EXPLANATION FOR BEGINNERS); Author: It's Your Girl Rose;https://www.youtube.com/watch?v=Gskqx8dy9To;License: Standard Youtube License