Question

In: Finance

A bond is convertible into 50 shares of common stock. The bond trades at 110 and...

A bond is convertible into 50 shares of common stock. The bond trades at 110 and the stock trades at $21. 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

II & III

I & III

II & IV

I & IV

Solutions

Expert Solution

A convertible bond can be converted into 50 shares of commond stock.

Price of the bond=$110

Price of the stock=$21

To evaluate the right option out of the following, certain calculations are needed:

1) Conversion ratio= Par value of bond/Price of equity

=110/21

=5.23

According to the conversion ratio, an investor should get 5.23 common stock in conversion of bond. But, he is getting 50 common stock. Hence, the investor is definitely in profit by getting around 44.77 more common stock than actual conversion ratio.

2) Conversion parity price=Value of convertible security/Conversion ratio

=110/50

=2.2

The conversion parity price of the stock should be $2.2. But, in reality it is trading at around $21. Which is quite higher than the conversion parity price.

CONCLUSION:

The stock trades above parity price of $2.2, while the current market price is $21. Hence the stock is traing above the parity price.

And, the investor is at a profit as according to the conversion ratio, the investor would get 5.37 shares on conversion. But, according to the conversion policy the investor is getting 50 common stocks.

So the correct answer is

1 and 3

that is,

The stock is trading above parity and converting the bond would be profitable.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

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

A bond is convertible into common stock for $20. If the bond trades at 120, what...

A bond is convertible into common stock for $20. If the bond trades at 120, what is the parity price of the stock? $60 $50 $25 $24

A bond is convertible into common stock for $50. If the company announces a 50% stock...

A bond is convertible into common stock for $50. If the company announces a 50% stock dividend, what is the new conversion price? $18.18 $22.22 $33.33 $45.45

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?

A bond is convertible into common stock for $20. If the company announces a 10% stock...

A bond is convertible into common stock for $20. If the company announces a 10% stock dividend, what is the new conversion price? $18.00 $22.22 $33.33 $18.18

Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 16,800 shares of common stock outstanding...

Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 16,800 shares of common stock outstanding at the beginning of 2019. Francis issued 2,100 additional shares on May 1 and 1,400 additional shares on September 30. It also has two convertible securities outstanding at the end of 2019. These are: Convertible preferred stock: 1,750 shares of 8.0%, $50 par, preferred stock were issued on January 2, 2016, for $55 per share. Each share of preferred stock is convertible into 2...

Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 31,200 shares of common stock outstanding...

Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 31,200 shares of common stock outstanding at the beginning of 2016. Francis issued 3,900 additional shares on May 1 and 2,600 additional shares on September 30. It also has two convertible securities outstanding at the end of 2016. These are: Convertible preferred stock: 3,250 shares of 9.0%, $50 par, preferred stock were issued on January 2, 2013, for $60 per share. Each share of preferred stock is convertible into 3...

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000...

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 6% convertible bonds outstanding during 2015. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.60 per share on the common stock and $1.50 per share on the preferred stock. Each $1,000 bond is convertible into 40 shares of common stock. The net income for 2015 was $400,000 and the income tax rate was 30%....

Coronado Industries had 202000 shares of common stock, 19300 shares of convertible preferred stock, and $596000...

Coronado Industries had 202000 shares of common stock, 19300 shares of convertible preferred stock, and $596000 of 9% convertible bonds outstanding during 2021. The preferred stock is convertible into 39700 shares of common stock. During 2021, Coronado paid dividends of $0.55 per share on the common stock and $1.70 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2021 was $350000 and the income tax rate was 35%....

Stock trades at $50. An at the money call option trades at $4. The maturity of...

Stock trades at $50. An at the money call option trades at $4. The maturity of the option is two years. The present value of the strike price over the two years is $45. The stock pays a dividend of 3 dollars in one year and no other dividends prior to expiration. The present value of the dividend is $2. The price of the European call option is $5. The price of the European put is $1.0. Construct a strategy...

Subjects