Straight Bond Value

The straight bond value is what the convertible bonds would sell for if they could not be converted into common stock. It will depend on the general level of interest rates and on the default risk. Suppose that straight debentures issued by Seagate had been rated A, and A-rated bonds were priced to yield 4 percent on November 1, 1995. The straight bond value of Seagate convertible bonds can be determined by discounting the $33.75 semiannual coupon payment and principal amount at 4 percent.7

The straight bond value of a convertible bond is a minimum value. The price of Seagate's convertible could not have gone lower than the straight bond value.

Figure 24.2 illustrates the relationship between straight bond value and stock price. In Figure 24.2 we have been somewhat dramatic and implicitly assumed that the convertible bond is default free. In this case the straight bond value does not depend on the stock price and so it is graphed as a straight line.

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