Question: Several years ago, a firm issued convertible debentures with a coupon rate of 7 .5 percent, callable at a 4-percent premium. The conversion price was set at $20. Today, the firm's common shares trade at $23.50 and interest rates are 9 percent. The firm is considering whether or not to call the issue.
(a) What is the conversion ratio?
(b) If an investor were to convert his debentures into common shares today, how much would he receive in value? Can the firm force conversion?
(c) Why may the firm want to call the debentures when the current interest rate is higher than the coupon rate?