A convertible bond is selling for $993.It has 15 years to maturity,$1,000 face value,and pays 8% coupon interest payments annually.Similar straight bonds (nonconvertible)are priced to yield 8.5%.The conversion ratio is 20.The stock is currently selling for $45.Calculate the convertible bond's option value.

Question

Quizplus · Accepted Answer

The correct answer is A because the convertible bond's option value is $34.52. The option value is the difference between the convertible bond's price and the straight bond's price. The straight bond's price is $993 / (1 + 0.085)^15 = $630.47. The convertible bond's price is $993. The option value is $993 - $630.47 = $34.52.

A Convertible Bond Is Selling for $993