A 10-year convertible bond has a face value of $1,000,a 9% coupon,and a conversion ratio of 30.The stock is currently priced at $35.If a comparable straight bond would have a yield of 9%,what is the minimum value of the call option provided by the convertible?
A) $0
B) $5
C) $50
D) $65

Question

Quizplus · Accepted Answer

Bond value = $1,000 because coupon rate = market rateConversion value = 30 × $35 = $1,050Value of call = $1,050 − 1,000 = $50

A 10-Year Convertible Bond Has a Face Value of $1,000,a