Reba owns a convertible bond issued by Macrofirm Inc. The bond has a par value of $1000, a conversion ratio of 40, a coupon rate of 6 percent, and will mature in 2019. The market price of Macrofirm's common stock has risen steadily over the past three years and is currently $35 per share. Which of the following best describes Reba's situation?

Question

Quizplus · Accepted Answer

With the market price of the common stock currently at $35, Reba can convert her convertible bond into common stock at a price of $25 ($1000 par value divided by the conversion ratio of 40). As the market price of the common stock has been rising steadily, it is likely to continue to rise, making it attractive for Reba to convert her bond into common stock. Additionally, the coupon rate on the bond is 6 percent, which is a relatively low rate given the current market conditions, making it less attractive to hold until maturity. Therefore, converting the bond into common stock may be the best option for Reba.

Reba Owns a Convertible Bond Issued by Macrofirm Inc