91Ó°ÊÓ

The business entity wishing to generate capital from debt sources issues securities that require regular interest payment are known as bonds.

Calculation of conversion value

$\begin{array}{rcl}Conversionvalue& =& Stockprice×Conversionratio\\ & =& \$36×40\\ & =& \$1,440\\ & & \end{array}$

Calculation of the current market price of the convertible bond.

localid="1657880891451" $\begin{array}{c}Current\text{ }market\text{ }price=Conversion\text{ }value+Premium\text{ }value\\ =\$1,440+\$60\\ =\$1,500\end{array}$

Calculating convertible bond one year later (today)

localid="1657880895729" $\begin{array}{c}Conversion\text{ }value=Stock\text{ }price×Conversion\text{ }ratio\\ =\$46×40\\ =\$1,840\end{array}$

Calculation of the current market price of the convertible bond.

localid="1657880899627" $\begin{array}{c}Current\text{ }market\text{ }price=Conversion\text{ }value+Premium\text{ }value\\ =\$1,840+\$10\\ =\$1,850\end{array}$

The band has also paid $120 over the year (12% of $1,000)

localid="1657880903909" $\begin{array}{c}Rate\text{ }of\text{ }return=\frac{New\text{ }conversion\text{​â¶Ä‰}value+Interest-Previous\text{ }market\text{ }price}{Previous\text{ }market\text{ }price}\\ =\frac{\$1,850+\$120-\$1,500}{\$1,500}\\ =31.33\%\end{array}$

C = coupon payment = $120.00 (Par Value Coupon Rate)

n = number of years

i = market rate, or required yield = 8.000% = 0.08

k = number of coupon payment in 1 year = 2

P = value at maturity, or par value = 1000

$\begin{array}{c}Bond\text{ }price=C/k×\frac{[1-\left[\frac{1}{{(1+i/k)}^{nk}}\right]]}{i/k}+\frac{P}{{(1+i/k)}^{nk}}\\ =120/2×\frac{[1-\left[\frac{1}{{(1+0.0800/2)}^{9×2}}\right]]}{0.0800/2}+\frac{1000}{{(1+0.0800/2)}^{9×2}}\\ =60.00×\frac{[1-\left[\frac{1}{{(1+0.0400)}^{18}}\right]]}{0.0400}+\frac{1000}{{(1+0.0400)}^{18}}\\ =60.00×\frac{[1-\left[\frac{1}{2.026}\right]]}{0.0400}+\frac{1000}{2.026}\end{array}$

$\begin{array}{c}Bond\text{ }price=60.00×\frac{1-0.4936}{0.0400}+\frac{1000}{2.026}\\ =60.00×12.66+493.63\\ =759.56+493.63\\ =\$1,253.19\end{array}$

Analysis, isthe pure bond value have a significant effect on valuation then.

No, the $1,253.54 value of the pure bonds is still significantly less than the $1,840 conversion value and the $1,850 market value. The valuation would not be significantly impacted. The stock price has a significant impact on convertible bond pricing.