Sam owns a $1,000 par value, convertible bond that can be converted now. The conversion ratio is 20, and each share of stock is currently selling for $40 per share. What would be the conversion value of the bond, and should Sam convert the bond or hold it to maturity?

Question

Quizplus · Accepted Answer

The conversion value is calculated by multiplying the conversion ratio (20) by the current market price of the stock ($40), which gives a conversion value of $800. However, since the par value of the bond is $1,000, Sam would receive a higher value by converting the bond into stock at the conversion ratio of 20. Therefore, Sam should choose to convert the bond and receive the $2,000 value (20 shares x $40 per share).

Sam Owns a $1,000 Par Value, Convertible Bond That Can