You own a $1,000 par value convertible bond with a 6% coupon rate. The bond is convertible into 20 shares of stock at the investor's discretion. The stock price has reached $51 per share with a $1 per share annual dividend, but you do not forecast any further price appreciation in the stock. Should you make the conversion?

Question

Quizplus · Accepted Answer

The total value of the stock if converted would be 20 shares * $51 = $1020, which is only $20 more than the bond's par value of $1000. However, by holding onto the bond, you would receive a 6% coupon, which amounts to $60 annually, versus the $20 you would receive from the stock's dividend ($1 per share * 20 shares). Therefore, converting to stock would result in a net loss of $40 in annual income.

You Own a $1,000 Par Value Convertible Bond with a 6