A convertible bond has a call price of $1,100.Its underlying stock is selling at $70 per share,and the conversion price is $50.If owners of the convertible bond convert and sell the stock,what is the profit or loss on each bond if the convertible is called by the company?

Question

Quizplus · Accepted Answer

If the convertible bond is called by the company, the holder will receive the call price of $1,100. However, if the owner chooses to convert the bond and sell the stock, they will receive 22 shares ($1,000/$50 conversion price) of the underlying stock, which at $70 per share, has a total value of $1,540. Selling these shares results in a profit of $440 ($1,540 - $1,100 call price).

Therefore, the profit on each bond is $440, which is a loss of $300 ($440 profit - $100 premium paid for the bond) compared to simply holding the bond until it matures. So, the correct answer is C.

A Convertible Bond Has a Call Price of $1,100