This assumption simplifies the calculations involved

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: e payment of annual rather than semiannual bond interest. This assumption simplifies the calculations involved, while maintaining the conceptual accuracy of the procedures presented. CHAPTER 16 Hybrid and Derivative Securities 689 $1,000 par value. The conversion values of the bond when the stock is selling at $30, $40, $50, $60, $70, and $80 per share are shown in the following table. Market price of stock $30 40 Conversion value $ 600 800 50 (conversion price) 1,000 (par value) 60 1,200 70 1,400 80 1,600 When the market price of the common stock exceeds the $50 conversion price, the conversion value exceeds the $1,000 par value. Because the straight bond value (calculated in the preceding example) is $867.76, the bond will, in a stable environment, never sell for less than this amount, regardless of how low its conversion value is. If the market price per share were $30, the bond would still sell for $867.76—not $600—because its value as a bond would dominate. Market Value market premium The amount by which the market value exceeds the straight...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online