Given the following information concerning a convertible bonds: Principal$1,000Coupon5%Maturity15 yearsCall price$1,050Conversion price$37 (i.e., 27 shares)Market price of the common stock$32Market price of the bond$1,040F.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.If the price of the common stock should double, would the price of the convertible bond double? Briefly explain your answer?H.If the price of the common stock should decline by 50 percent, would the price of the convertible bond decline by the same percentage? Briefly explain your answer.I.What is the probability that the corporation will call this bond?J.Why are investors willing to pay the premiums mentioned in parts (d) and (f)

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Given the following information concerning a convertible bonds:

Principal	$1,000
Coupon	5%
Maturity	15 years
Call price	$1,050
Conversion price	$37 (i.e., 27 shares)
Market price of the common stock	$32
Market price of the bond	$1,040

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.	If the price of the common stock should double, would the price of the convertible bond double? Briefly explain your answer?
H.	If the price of the common stock should decline by 50 percent, would the price of the convertible bond decline by the same percentage? Briefly explain your answer.
I.	What is the probability that the corporation will call this bond?
J.	Why are investors willing to pay the premiums mentioned in parts (d) and (f)