A $1,000 face value 7% convertible bond pays interest semi-annually and has a maturity date of five years. The conversion price is $40. The market yield on nonconvertible debentures of comparable quality is 8%. The market price of the common stock is $38.50 currently. What is the minimum price at which the convertible bond should sell?

Question

Quizplus · Accepted Answer

The minimum price of the convertible bond is the higher of its conversion value and its straight bond value. The conversion value is calculated as (1000/40) * 38.50 = $962.50. The straight bond value is calculated using the market yield of 8% for nonconvertible bonds. Since the conversion value is higher, the minimum price is $962.50.

A $1,000 Face Value 7% Convertible Bond Pays Interest Semi-Annually