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WAS Inc. issued a convertible bond which bondholders can convert their bond into firm’s common stocks right after the third year. This bond is 15-year, 8 percent coupon bond with $1,000 face value. The current interest rate is 7% and the stock price is $20 per share. The future interest rate at t=3 can be either 10% (with 60% chance) or 4% (40% chance). Also, the future stock price at t=3 can be either $40 or $19 with the equal probability (50% each). The conversion ratio is 30. Coupon is paid annually. What would be the price of this convertible bond.

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Financial Management, Finance

Category:- Financial Management
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