Par 1010270 cor 9 0903270 col 6 convertible bond

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0903270-Col-MBA-18-19 6 Convertible Bond Valuation Example You are considering investing in the Convertible below: Underlyer - J.C. Penney (JCP) Stock Price - $23.46 Notional Value per Bond - $1,000 Bond Price - $95 Convertible to - 35.0877 shares Time to Maturity - 3 years Rebate Rate - 0.75%  Coupon, Dividend Yield - 0 Call Features - None 3-year Treasury Yield - 2.5% CDS Spread (per year) - 1% JCP 3-year est. Volatility - 25% Expected Execution Shortfall - 0.5% a) What is parity? b) What is the equity premium? c) What is the strike price of the embedded option? d) Where would you value the bond? 1010270-Cor-9
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0903270-Col-MBA-18-19 7 J.C. Penney Example a) Parity = 35.0877 x 23.46 = 823.16 b) Equity Premium = 950 – 823.16 = 126.84 c) Strike Price = 1000/35.0877 = 28.5 d) Bond Valuation  = Straight Bond + Call Option Straight Bond = 1000/(1 + .025 + .01) 3   = 901.94 Call Option = Stock Price = 23.46 x .995 = 23.34, Strike = 28.5 = Div Yld = 0, Int Rate = .75%, Vol = 25% = 2.48 x 35.0877 = 87.014 Bond Value = 901.94 + 87.014 = 988.954 1010270-Cor-9
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0903270-Col-MBA-18-19 8 Tax Treatment: The purchase of a stock does not trigger a taxable event Gain or loss from the sale of a stock held for one year or less  generally is short-term capital gain or loss, while gain or loss  from the sale of a stock held more than one year generally is  long-term capital gain or loss Dividend distributions are taxed as dividend income Tax Treatment: A short sale is really the customer’s obligation to deliver  shares to its broker; the short sale is closed, and a taxable  event occurs, when customer delivers those shares The short sale of a stock does not trigger a taxable event Gain or loss from covering a short stock position is always  short-term capital gain or loss The rebate received on a short sale is taxed as interest  income How Stocks are Taxed Long Position Long Position Short Position Short Position 1010271-Cor-10
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0903270-Col-MBA-18-19 9 Certain U.S. Federal Tax Rates Generally Applicable  to Different Types of Investment Income a) U.S. persons only.  Owner of mutual fund is not  treated as owning shares held by the fund. b) Includes industrial corporations, banks, and insurance companies, although banks and insurance companies are also subject to  special industry-specific rules. c) Pension funds generally are tax exempt, but like all exempt entities they are subject to tax on “unrelated business taxable income”  (“UBTI”), which includes income from activities unrelated to the entity’s exempt purpose, such as manufacturing, and a portion of  any income from debt-financed property, such as securities purchased on margin.
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