ZYX company, has 7% convertible bond due 20years from now. The convertible bond has a par value of $1000 and selling at $870. The conversion price of the bond is $40 per share. A non-convertible coupon bond of similar quality is currently yielding 9%. The common stock of this firm is selling at $32 per share. Assume that bond interest payment are made annually.
1. Determine the conversion ratio of the convertible bond.
2. Calculate the conversion premium of the convertible bond.
3. What is the minimum price at which the convertible bond should sell.
4. Explain why a convertible bond sells at a premium above its value as a bond or common stock.