Question 2. (15 points) An investment company recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $25 a share. At the time of issue, the company's underlying stock price is $20.
a. Calculate the convertible issue's conversion ratio?
b. After issuance, will the bond likely increase, decrease, or not change in value if the underlying stock price changes to $23 per share and everything else remains constant? Why?
c. The bondholder converts the bond to common stock when the price of the underlying stock reaches $35. What is the total market value of the new shares?
d. How does the company's balance sheet change at the point the bondholders convert their bonds to common stock? Explain?
e What are 3 advantages to the investor in buying convertible bonds instead of the stock itself?