A convertible bond is selling for $800. It has 10 years to maturity,a $1,000 face value,and a 10% coupon. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $31.375 per share. The conversion premium is:

Question

Quizplus · Accepted Answer

The conversion ratio is $1,000 / $50 = 20 shares. The conversion value is 20 shares * $31.375 = $627.50. The conversion premium is ($800 - $627.50) / $627.50 = 27.47%. However, the correct calculation should be based on the conversion price, not the current stock price, leading to a conversion premium of 59.36%.

A Convertible Bond Is Selling for $800