If a $1,000 convertible bond has a conversion ratio of 50 and the firm's equity is currently selling for $22 per share, then the:
A)Bond should trade for $900
B)Bond should trade for $1,000
C)Bond should trade for $1,100
D)Firm will have already converted the bond

Question

Quizplus · Accepted Answer

The conversion ratio of 50 means that each bond can be converted into 50 shares of the firm's equity. At a current share price of $22, those 50 shares would be worth $1,100. Therefore, the bond should trade for at least its face value of $1,000 plus the value of the conversion option, which is $100 ($1,100 - $1,000). Thus, the correct answer is option C.

If a $1,000 Convertible Bond Has a Conversion Ratio of 50