Float a convertible bond issue. It is a $100,000 convertible bond (par value $1,000). The (annual) coupon rate is 3.50%. The bond matures in 15. These are convertible to common stock at the 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 the client's shares in a public market with a strike price of $20 that expires in 172 days. Current value of this put is $2.86. This information can help find the current implied market estimate of the annualized standard deviation of stock returns (sigma) on the clients stock. The yield on six-month Treasury bills is currently 0.32%.
The client also has a couple of long-term straight-bonds that trade on the market, and you can estimate the yield-to-maturity on these instruments. A bond series matures in 4 years and bears a yield of 3.17%. Another issue matures in 8 years with a yield of 4.76%.
Finally, there is an issue that matures in 22 years, and these bear a yield of 5.62%. Use this data to estimate an appropriate yield on straight-bonds issued by the firm. Estimate a reasonable value for these convertible bonds, based on the information that you have collected.