Mainord Corporation issues $100,000 of 10-year, 6% convertible bonds. Each $1,000 bond is convertible into 30 common shares. On the date of the issue, the shares had a market value of $50 per share. What is the intrinsic value of the conversion feature? (Round any intermediary calculations to the nearest cent, and round your final answer to the nearest dollar.)
A) $5,000
B) $150,000
C) $50,010
D) $3,000

Question

Quizplus · Accepted Answer

The intrinsic value of the conversion feature is the difference between the market value of the common shares into which the bonds are convertible and the conversion price. In this case, the market value of the common shares is $50 per share, and the conversion price is $1,000 / 30 = $33.33 per share. Therefore, the intrinsic value of the conversion feature is $50 - $33.33 = $16.67 per share. Since there are 100 bonds, the total intrinsic value of the conversion feature is $16.67 * 100 = $1,667.

Mainord Corporation Issues $100,000 of 10-Year, 6% Convertible Bonds