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bbristow2010 posted a question
5 Fifteen years ago, Roop Industries sold \$400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their \$1,000 par value. The conversion price was set at \$62.75, and the common stock price was \$55 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.75% at the time Roop’s bonds were issued.
• c. At the time the bonds were issued, what was the value per bond of the conversion feature?
• d. Suppose the price of Roop’s common stock fell from \$55 on the day the bonds were issued to \$32.75 now, 15 years after the issue date (also assume the stock price never exceeded \$62.75). Assume interest rates remained constant. What is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? Do you think it is likely that the bonds will be converted?
• e. The bonds originally sold for \$1,000. If interest rates on A-rated bonds had remained constant at 8.75% and if the stock price had fallen to \$32.75, then what do you think would have happened to the price of the convertible bonds? (Assume no change in the standard deviation of stock returns.)

• f. Now suppose that the price of Roop’s common stock had fallen from \$55 on the day the bonds were issued to \$32.75 at present, 15 years after the issue. Suppose also that the interest rate on similar straight debt had fallen from 8.75% to 5.75%. Under these conditions, what is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? What do you think would have happened to the price of the bonds?