1) Your client is floating a convertible bond issue.

It is $100,000 convertible bond (par value $1,000). (annual) coupon rate is= 3.50%. Bond matures in 15. These are convertible to common stock at end of year 7. Client has= 11,347,500 shares of common stock outstanding, trading at= $17.52. Conversion ratio is= 40. Yield on seven-year Treasuries is= 2.10%.

There is a put option trading on client’s shares in public market with the strike price of= $20 which expires in 172 days. Present value of this put is= $2.86. This information can help determine the present implied market estimation of annualized standard deviation of stock returns (sigma) on clients stock. Yield on six-month Treasury bills is presently= 0.32%.

Client also has couple of long-term straight-bonds which trade on market, and you can evaluate the yield-to-maturity on these instruments. Bond series matures in 4 years and bears the yield of= 3.17%. Another issue matures in 8 years with a yield of= 4.76%.

Ultimately, there is issue which matures in 22 years, and these bear a yield of= 5.62%. Use this data to evaluate the suitable yield on straight-bonds issued by firm. Evaluate a reasonable value for these convertible bonds, based on information which you have collected.