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Textron Corp. has 8% convertible bonds outstanding, each with a par value of $1,000. The...

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Finance

Textron Corp. has 8% convertible bonds outstanding, each with a par value of $1,000. The bonds mature in 21 years and have a conversion ratio of 35. The companys common shares are currently trading at $35.

Please answer the following questions and show ALL work.

a) (1 mark) What is the conversion value of the bond?

b) (1 mark) If the share price falls to $22.80 one year later, what is the conversion value of the bond?

c) (2 marks) If interest rates (on similar bonds) move up to 10% one year later, and there is 20 years left to maturity what is the pure value of the bond? Assume semi-annual analysis.

d) (2 marks) Expanding on your answer to part c) if the company announces very strong financial results and the stock price increased to $50, what would you expect to happen to the market price of the convertible bonds? Explain your response.

e) (3 marks) Alternatively, expanding on your answer to part c) if the company announces very disappointing financial results and the stock price dropped to $15, what would you expect to happen to the market price of the convertible bonds? Explain your response.

f) (1 mark) What is the primary reason companies issue convertible bonds?

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