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Posted: January 23rd, 2023

Chapter 21. Convertible Bonds

1. De ne and quantify the following terms related to convertible bonds:
(a) conversion ratio, (b) callability, (c) fair premium, (d) parity, (e)
breakeven, and (f) dilution.

2.
You are given the following input information:

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Face value of the CB

$100

Issue price of the CB

$120

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Equity
price

$10

Conversion
ratio

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11

(a) What is the parity
value per bond?

(b) What is the premium
over parity per bond?

(c) Express the same
results on a per-share basis.

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3.
In the previous question, you had computed the value of parity and
premium over parity. Suppose the coupon rate on the convertible was 5% and the
dividend yield on the equity is 1%. What is the extra income from the
convertible relative to equity? What is the breakeven for the convertible?

4. What are the di erent types of embedded options within a
convertible bond? Explain whether they bene t the investor or the issuer.

5. What incentive issue has been commonly resolved by the issuance of
a convertible bond by the management of a rm?

6. The face value of a convertible bond is $100, and the issue price
is $150, with a conversion ratio of 5. The market price of the equity shares is
$25. Compute the (a) conversion price, (b) parity, and (c) premium of the bond.

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