Question
In: Finance
A bond is convertible into common stock for $25. The bond trades at 120 and the...
A bond is convertible into common stock for $25. The bond
trades at 120 and the stock trades at $32. Which of the following
are true?
I. The stock trades above parity
II. The stock trades below parity
III. Converting the bond would be profitable
IV. Converting the bond would not be profitable
I & III
II & IV
I & IV
II & III
Solutions
Expert Solution
Correct option is Option A - I & III (I. The stock trades above parity & III. Converting the bond would be profitable)
Reasoning-
Common stock parity price = $25.
Current price of stock = $32.
Current price of Convertible Bond = $120
-Diffennce in Current price of stock and Common stock parity price i.e. $32- $25 = $7) Thus, The stock trades above parity.
On Converting the bond, Bondholder would have profit as stock trades above parity as bondholder will get higher value stock at conversion price of $25.
Thus, Converting the bond would be profitable.
Thus I & III are true
jeff jeffy answered 2 years agoRelated Solutions
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