Titi, a Japanese Company, Issued a Six-Year International Bond in Dollars

Essay

Titi, a Japanese company, issued a six-year international bond in dollars convertible into shares of the company. At time of issue, the long-term bond yield on straight dollar bonds was 10% for such an issuer. Instead, Titi issued bonds at 8%. Each $1,000 par bond is convertible into 100 shares of Titi. At time of issue, the stock price of Titi is 1,600 yen, and the exchange rate is 100 yen = 0.5 dollars ($/¥ = 0.005, ¥/$ = 200).
a. Why can the bond be issued with a yield of only 8%, below the market rate for straight dollar bonds?
b. What would happen if:
$\bullet$ The stock price of Titi increases?
$\bullet$ The yen appreciates?
$\bullet$ The market interest rate of dollar bonds drops?
A year later, the new market conditions are as follows:
$\bullet$ The yield on straight dollar bonds of similar quality has risen from 10% to 11%.
$\bullet$ Titi stock price has moved up to ¥ 2,000.
$\bullet$ The exchange rate is $/¥ 0.006.
c. What would be a minimum price for the Titi convertible bond?
d. Could you try to assess the theoretical value of this convertible bond as a package of other securities, such as straight bonds issued by Titi, options or warrants on the yen value of Titi stock, and futures and options on the dollar/yen exchange rate?