Question

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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 ago
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