Acme Medical Supplies, Inc., issued a zero coupon convertible bond due 10 years from today. The bond has a face value of $1,000 at maturity. Each bond can be converted into 25 shares of Acme’s common stock. The appropriate interest rate is 10 percent. The company’s stock is selling for $12 per share. Each convertible bond is traded at $400 in the market.
a. What is the straight bond value?
b. What is the conversion value?
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c. What is the option value of the bond?