You own ﬁve convertible bonds. These bonds have a 6 percent coupon, a $1,000 face value and mature in 9 years. The bonds are convertible into shares of common stock at a conversion price of
$22)50. How many shares of stock will you receive if you convert all of your bonds?

Question

Quizplus · Accepted Answer

Each bond has a face value of $1,000 and a coupon rate of 6%, which means the annual coupon payment is $60 (=$1,000 x 6%). The bonds mature in 9 years, so they will make 9 coupon payments in total. The total coupon payments for 5 bonds will be:
Total coupon payments = $60 x 5 x 9 = $2,700
Now, let's consider the conversion feature. Each bond can be converted into shares of stock at a conversion price of $22.50 per share. This means that each bond can be converted into:
Stock received per bond = $1,000 ÷ $22.50 = 44.44 shares
Since there are 5 bonds, the total number of shares received upon conversion will be:
Total shares received = 44.44 shares/bond x 5 bonds = 222.22 shares
Therefore, the correct answer is D) 222.22 shares.

You Own ﬁVe Convertible Bonds