1. You have purchased a convertible bond for $1,093.76. It is convertible into 58 shares of...

You have purchased a convertible bond for $1,093.76. It is convertible into 58 shares of the firm’s common stock. The current stock price is $15.60 per share.

a. What is the market conversion value of the bond?

b. What is the conversion premium?

c. Will you choose to convert the stock now?

Solutions

Expert Solution

What is the market conversion value of the bond?

Answer: $904.80

What is the conversion premium?

Answer: -$188.96

Will you choose to convert the stock now?

Answer: NO

Working

What is the market conversion value of the bond?

Market conversion value is the Market value of the shares against which bonds are exchange. Formula for calculating the market conversion value is as follows;

Market conversion value = Market value of the share * Number of shares

= $15.60 * 58 shares

=$904.80

What is the conversion premium?

Formula for calculating conversion premium is as follows;

Conversion premium = Market conversion value – Bond purchase price

= $904.80 - $1,093.76

= -$188.96

Will you choose to convert the stock now?

Answer: NO, value of the converted shares will be lesser than the current value of the bond, so it is not recommended to convert the bond to shares.

jeff jeffy answered 1 year ago

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