646 Part Seven Debt Financing
bre44380_ch24_618-651.indd 646 10/05/15 12:54 PM
a. What is the bond’s conversion value?
b. Can you explain why the bond is selling above conversion value?
c. Should Surplus call? What will happen if it does so?- Convertible bonds Piglet Pies has issued a zero-coupon 10-year bond that can be con-
verted into 10 Piglet shares. Comparable straight bonds are yielding 8%. Piglet stock is priced
at $50 a share.
a. Suppose that you had to make a now-or-never decision on whether to convert or to stay
with the bond. Which would you do?
b. If the convertible bond is priced at $550, how much are investors paying for the option to
buy Piglet shares?
c. If after one year the value of the conversion option is unchanged, what is the value of the
convertible bond? - Convertible bonds Iota Microsystems’ 10% convertible is about to mature. The conversion
ratio is 27.
a. What is the conversion price?
b. The stock price is $47. What is the conversion value?
c. Should you convert? - Convertible bonds In 1996, Marriott International made an issue of unusual bonds called
liquid yield option notes, or LYONS. The bond matured in 2011, had a zero coupon, and
was issued at $532.15. It could have been converted into 8.76 shares. Beginning in 1999 the
bonds could have been called by Marriott. The call price was $603.71 in 1999 and increased
by 4.3% a year thereafter. Holders had an option to put the bond back to Marriott in 1999
at $603.71 and in 2006 at $810.36. At the time of issue the price of the common stock was
about $50.50.
a. What was the yield to maturity on the bond?
b. Assuming that comparable nonconvertible bonds yielded 10%, how much were investors
paying for the conversion option?
c. What was the conversion value of the bonds at the time of issue?
d. What was the initial conversion price of the bonds?
e. What was the conversion price in 2005? Why did it change?
f. If the price of the bond in 2006 was less than $810.36, would you have put the bond back
to Marriott?
g. At what price could Marriott have called the bonds in 2006? If the price of the bond in
2006 was more than this, should Marriott have called them? - Convertible bonds The Surplus Value Company had $10 million (face value) of convert-
ible bonds outstanding in 2015. Each bond has the following features.
Face value $1,000
Conversion price $25
Current call price 105 (percent of face value)
Current trading price 130 (percent of face value)
Maturity 2022
Current stock price $30 (per share)
Interest rate 10% (coupon as percent of face value)