Unformatted text preview: FA, discounted at 14% for
20 years, from Table A–4.
c Present value interest factor for $1, PVIF, discounted at 14% for year 20,
from Table A–2. This value, $867.76, is the minimum price at which the convertible bond is
expected to sell. (The value calculated using a financial calculator is $867.54.)
Generally, only in certain instances in which the stock’s market price is below the
conversion price will the bond be expected to sell at this level. Conversion (or Stock) Value
Recall that the conversion (or stock) value of a convertible security is the value of
the convertible measured in terms of the market price of the common stock into
which the security can be converted. When the market price of the common stock
exceeds the conversion price, the conversion (or stock) value exceeds the par
value. An example will clarify the point.
EXAMPLE Duncan Company’s convertible bond described earlier is convertible at $50 per
share. Each bond can be converted into 20 shares, because each bond has a 11. Just as we did in Chapter 6, we continue to assume th...
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