Lucinda owns a $1,000 face value convertible bond that matures in six years, has a coupon rate of 6.5 percent, paid annually, and a conversion price of $17.50. Similar bonds have a current market return of 6.35 percent while the related stock is priced at $18.03 per share. What is the conversion value of this bond?

Question

Quizplus · Accepted Answer

The conversion value of a bond is calculated by multiplying the current price of the stock by the number of shares for which the bond can be exchanged. The bond can be converted into shares at a price of $17.50 per share, so the number of shares you get from converting a $1,000 bond is $1,000 / $17.50 = 57.14 shares (rounded to two decimal places for simplicity). With the stock priced at $18.03 per share, the conversion value is 57.14 shares * $18.03 = $1,030.29.

Lucinda Owns a $1,000 Face Value Convertible Bond That Matures