A convertible bond has a face value of $1,000 and a conversion price of $35. The bond has a 9 percent coupon and pays interest semi-annually. The bond matures in 7 years. Similar bonds are
Yielding 8.5 percent. The current price of the stock is $36.30. What is the conversion value of this
Bond?
A) $989.16
B) $1,000.00
C) $1,025.98
D) $1,037.14
E) $1,041.07

Question

Quizplus · Accepted Answer

The conversion value is the market value of the underlying stock that the convertible bond can be converted into. To calculate the conversion value, divide the face value of the bond ($1,000) by the conversion price ($35), then multiply by the current price of the stock ($36.30): 
Conversion value = ($1,000/$35) x $36.30 = $1,037.14
Since the conversion value is higher than the face value of the bond, it is advantageous for the bondholder to convert the bond into stock if the stock price continues to rise. Therefore, the conversion feature makes the bond more valuable, and explains why it typically offers a lower yield than a non-convertible bond with similar characteristics. 
Among the given choices, the closest answer is D.

A Convertible Bond Has a Face Value of $1,000 and a Conversion