You are considering the purchase of a convertible bond issued by Bildon Enterprises, a noninvestment- grade medical service firm. The issue has seven years to maturity and pays a semiannual coupon...

You are considering the purchase of a convertible bond issued by Bildon Enterprises, a noninvestment- grade medical service firm. The issue has seven years to maturity and pays a semiannual coupon rate of 7.625 percent (i.e., 3.8125 percent per period). The issue is callable by the company at par and can be converted into 48.852 shares of Bildon common stock. The bond currently sells for $965 (relative to par value of $1,000), and Bildon stock trades at $12.125 a share.

a. Calculate the current conversion value for the bond. Is the conversion option embedded in this bond in the money or out of the money? Explain.

b. Calculate the conversion parity price for Bildon stock that would make conversion of the bond profitable.

c. Bildon does not currently pay its shareholders a dividend, having suspended these distributions six months ago. What is the payback (i.e., break-even time) for this convertible security and how should it be interpreted?

d. Calculate the convertible’s current yield to maturity. If a “straight” Bildon fixed-income issue with the same cash flows would yield 9.25 percent, calculate the net value of the combined options (i.e., the issuer’s call and the investor’s conversion) embedded in the bond.