Fixed Income Securities

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Course Code: IBF614
Fixed Income Exercise
Question 1
1) What is the conversion premium of the CB at the time of issuance on Jan 1, 2018? (2 marks)
Conversion Price = Nominal Value / Conversion Ratio
Conversion Price = $1,500 / 10 = $150
Conversion Premium = Conversion Price - Current Share Price
= $150 - $100 = $50
Therefore, the conversion premium is $50.
2) Analyse the convertible bond by the breakeven approach with the initial issuance data. (3 marks)
Breakeven Stock Price = Conversion Price / (1 - Conversion Premium)
Breakeven Stock Price = $150 / (1 - ($50 / $100)) = $300
This means that the stock price would need to double to $300 in order for the convertible bond to perform equally to the stock.
Since the current stock price on March 1, 2018, is $210, the bond is still performing better than the stock, as the investor can either hold onto the bond and continue receiving the annual coupon payments of 6%, or convert the bond into shares at the conversion price of $150 and sell the shares at the current market price of $210, generating a capital gain of $60 per bond ($210 - $150).
Therefore, based on the breakeven analysis with the initial issuance data, the ABC convertible bond is performing well relative to the underlying stock as of March 1, 2018.
3) What is the CB parity on Mar 1, 2018? (2 marks)
CB parity = (Current stock price x Conversion ratio) / Conversion price
CB parity = ($210 x 10) / $150 = $14
CB parity = $14
4) Can Company ABC call the CB on Mar 1, 2018? Why/why not? (3 marks)
Company ABC has a soft call option on the convertible bond, with a 125% tri...