Newlink Genetics (NLNK) has just issued 25-year callable convertible bonds with
ID: 2633952 • Letter: N
Question
Newlink Genetics (NLNK) has just issued 25-year callable convertible bonds with a coupon rate of 6% annually and a par value of $1,000. Coupon payments are made on a semi-annual basis and the bond has a conversion price of $95. The companies stock is selling for $31 per share. The owner of the bond will be forced to convert if the bonds conversion value is ever greater than or equal to $1,250. The required rate of return on an otherwise identical nonconvertible bond is 8%. a. What is the minimum value of the bond? b. if the stock were to grow by 15% forever, how long would it take the bonds conversion value to exceed $1,250?Explanation / Answer
(1)
The minimum value of the bond equals to the otherwise identical nonconvertible bond.
P = 1000*3%*PVIFA4%,30 + 1000*PVIF4%,30 = 1000*3%*(1-(1+4%)^(-30))/4% + 1000*(1+4%)^(-30) = $827.08
Therefore, the minimum value of the bond is $827.08
(2)
conversion rate = par value / conversion price = 1000/95
stock price = maximum conversion value / conversion rate = 1250/(1000/95) = $118.75
31 * (1 + 15%)^n = 118.75
n = 9.61 years
Therefore, it will take 9.61 years that the bonds conversion value to exceed $1,250