Coupon: 0% Conversion Ratio: 158 shares per $1000 principal amount Call Date: 1 July 2012 Maturity: 1 July 2019 A firm issues the convertible debt shown above. The price of stock in this company on 1 July 2012 is $6.58. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Question

Quizplus · Accepted Answer

The bond will be converted into shares if the value of the shares is greater than the call price. To find the minimum call price that would make a bondholder prefer to accept the call rather than convert, we need to determine the price at which the value of the bond equals the value of the shares. 
To do this, we can set up the following equation:
1000 = (S/6.58) + (P/1.04)
where S is the stock price, P is the call price, and 1.04 represents the conversion ratio (i.e. the number of shares per $1000 principal amount).
Simplifying the equation, we get:
P = 1000(1.04) - (S/6.58)(1.04)
Plugging in the given values, we get:
P = 1040 - (6.58/6.58)(1.04)
P = 1040 - 1.04
P = 1038.96
Therefore, the minimum call price that would make a bondholder prefer to accept the call rather than convert is par plus 4%, which is answer choice D.

Coupon: 0% Conversion Ratio: 158 Shares Per $1000 Principal Amount