Pittsburgh Steel Company has a convertible bond outstanding

Pittsburgh Steel Company has a convertible bond outstanding, trading in the marketplace at $950 The par value is $1,000, the coupon rate is 7 percent, and the bond matures in 25 years. The conversion price is $50 and the company\'s common stock is selling for $42 per share. Interest is paid semiannually. If the interest rate on similar bonds that are not convertible are currently yielding 12 percent, what will be the pure bond value of the Pittsburgh Steel Company bonds? (Use semiannual analysis.) Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Bond value

Solution

Pure Bond value n = 50, yield = 6% semi annual PV of annuity = 35*23.45562 820.9467 1000*3.5% PV of principal payment = 1000*(1/1.035^50) 179.053 1000*0.179053 Pure Bond Value 641.8937 Annuity Value (1-(1/(1+r)^50)/r 1-(1/(1.035^50)/0.035) 23.45562