Hamilton Products
Case 30
Convertibles
Purpose: The case encourages the student to more fully appreciate the financial characteristics of
convertible bonds. It also allows the student to see that the pure bond value is not necessarily stable,
but may change because of changing interest rates or business risk. The student not only views
upside potential, but increasing downside exposure as well.
Relation to Text: The case should follow Chapter 19. However, the student will also need to utilize
material from Chapter 10 for a bond value computation.
Complexity: The case tends to be reasonably straightforward and requires about ½ hour.
Solutions
2. First determine the conversion value:
3. First determine the conversion value:
Conversion value = Conversion ratio x Common stock
4. Pure Bond Value
Present value of interest payments
PVA = A x PVIFA (n = 17, i = 10%)