Assume you bought a convertible bond two years ago for $920. The bond has a conversion ratio of 30. At the time the bond was purchased, the stock was selling at $25 per share. The bond pays $100 in annual interest. The stock pays no cash dividend. Assume after two years the stock price rises to $45, and the firm forces investors to convert to common stock by calling the bond (there is no conversion premium). Would you have been better off if you had bought the stock directly or bought the convertible bond and eventually converted it into common stock? You would have invested $920 in either case.

Question

Quizplus · Accepted Answer

The Answer of Assume you bought a convertible bond two years ago for $920. The bond has a conversion ratio of 30. At the time the bond was purchased, the stock was selling at $25 per share. The bond pays $100 in annual interest. The stock pays no cash dividend. Assume after two years the stock price rises to $45, and the firm forces investors to convert to common stock by calling the bond (there is no conversion premium). Would you have been better off if you had bought the stock directly or bought the convertible bond and eventually converted it into common stock? You would have invested $920 in either case.

Assume You Bought a Convertible Bond Two Years Ago for $920