Annie's Investment in Atelier's Bonds Call Price Case Study

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Annie's Investment In Atelier's Bonds

Call price =$1,080

Call price = Face value+ interest (Extra payment to the bond holder)

Interest Income = Call Price - Face Value = $1,080 - $1,000 = $

After 5 years, Stock price = $ (30 x 50) = $1,500 If she sells the stock at the end of the 5 the year, then she will get income from sale of Stock = $ (1500-1000) = $500. Therefore, at the end of 5th year, Stock price will be greater than the Call Price and as such, the can convert the bonds into common stock.

Converting the bonds is a safe option for Annie since common stock is a safe, income-producing alternative to bonds. While convertible bonds give up some of the upside of a stock, the dividend component and the reduced volatility make them attractive investments for retirement accounts and accounts with a need for taxable income.

Question B

A. When RRR = 6%,

BO = I x PVIFA (6%, 25 yrs) + M x PVIF (6%, 25 yrs)

= 80 + 12.783 + 1000 x

= $1,255.

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B. When RRR = 8%,

BO = I x PVIFA (8%, 25 yrs) + M x PVIF (8%, 25 yrs)

= 80 + 10.675 + 1000 x 0.146

= $1,000

C. When RRR = 10%

BO = I x PVIFA (10%, 25 yrs) + M x PVIF (10%, 25 yrs)

= 80 + 9.077 + 1000 x 0.092

= $818.16

Coupon Interest Rate (CIR)

Required Rate of Return (RRR)

BO

Par Value

Analysis

Decision

8%

6%

$1,255.64

$1,000

RRRCIR

Discount

Question C

A. BO = [I + 2] x PVIFA (6%/2, 25 x 2 yrs) + M x PVIF (6%/2, 25 x 2 yrs.)

= [80 + 2] x 25.730 +1000 x 0.228

= $1,257.20

B. BO = [I + 2] x PVIFA (8%/2, 25 x 2 yrs) + M x PVIF (8%/2, 25 x 2 yrs.)

= 40 x 21.482 + 1000 x 0.141

= $1,000.28

C. BO = [I + 2] x PVIFA (10%/2, 25 x 2 yrs) + M x.....

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