Bondholders can convert their bond into firm common stocks

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Reference no: EM131356160

Firm A just issued a convertible bond which bondholders can convert their bond into firm’s common stocks right after the second year. This bond is 10-year, 6 percent coupon bond with $1,000 face value. The current interest rate is 7% and the stock price is $10 per share. The future interest rate at t=2 can be either 9% (with 40% chance) or 5% (60% chance). Also, the future stock price at t=2 can be either $45 or $15 with the equal probability (50% each). The conversion ratio is 25. Coupon is paid annually. What would be the price of this convertible bond?

Reference no: EM131356160

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