Noob question

[squidgy_wiji]

Hey I'm just trying to teach myself some bond pricing theory. I found a list of questions online and I knew the answer to all the questions but this one. Can anyone help me out? I would really appreciate it.

Question:
If interest rates go up/down...what would you do with a bond that is presently variable in coupon rate that has a convert option to a fixed coupon bond?

My Answer:
Well if interest rates went up the value of a normal bond will decrease. But this bond has a variable coupon so that means the coupon rate will increase so the yield will increase which will increase the price of the bond.

Do you have to do a DCF calculation for the bond with the variable rate and fixed rate and see which has a greater yield to get the answer or is there a simpler answer?

Thanks

 

[Martinghoul]

You don't need a DCF calculator if you have Excel, as you can use all its basic bond math functions.

As to the original question, it sounds like some sort of a trick. My answer would be that I don't know. The choice of whether to convert or not depends on the strike of the conversion option, as well as your expectation for rates going fwd.