You have just learned about a bond soon to be issued by XYZ Inc. that has the proper risk characteristics of your portfolio. The bond has a par value of $1,000, 15 years to maturity, a 9% coupon, and pays interest semiannualy. The bond is convertible into 50 shares of XYZ common stock, at the discretion of the bondholder. XYZ common stock is selling for $15 per share. The bond can also be called at any time by the firm for $1,050.
A) If your cost of capital is 12%, what is the maximum price you should pay for the bond?
B) You purchased the bond described above at its fair market price when issued. That was five years ago. You just recieved the tenth interest payment. Bonds of this quality are currently being priced to yield 10%. Recall that when you bought the bond, XYZ common stock was selling for $15 per share. During the last five years, the price of the common stock has on average increased 8% per year. What is the price of the bond in today's market?
C) If XYZ were to call the bond today, what would you do?