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A convertible bond can be converted into common stock of the bond issuer at a price...

A convertible bond can be converted into common stock of the bond issuer at a price of $20 per share. The bond is currently selling at $800. What is the parity price of the underlying stock?

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Expert Solution

Conversion parity price can be defined as price that we are indirectly paying for the shares through bond.

Conversion parity price = Bond Price / Conversion ratio

Bond Price = $800

Conversion ratio = Par Value of bond / Share price

= $1000 / $20

= 50

Therefore Conversion parity price

= $800 / 50

= $16

The parity price of the underlying stock is $16

jeff jeffy answered 2 years ago
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