Straight bond value €978 Value of embedded issuer call option €43 Value of embedded investor put option €26 Value of embedded call option on issuer’s stock €147 Conversion price €12.50 Current common stock share price €11.75
The note says the share price will approach but not exceed the conversion price and asking us to determine whether the bond return will be higher or lower than stock return.
A is correct. Over the next year, Gillette believes that Raffarin’s share price will continue to increase towards the conversion price but not exceed it. If Gillette’s forecast becomes true, the return on the RI bond will increase but at a lower rate than the increase in Raffarin’s share price because the conversion price is not expected to be reached.
But isn’t the bond return supposed to be higher than stock return since the conversion option wont be exercised and the convertible bond will behave more like a straight bond?