You own a bond that has a face value of $1,000 and a conversion ratio of 25. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.

Question

Quizplus · Accepted Answer

The market value of the bond is $1,000 + $40 = $1,040. The conversion value of the bond is 25 x $41.20 = $1,030, which is less than the call price by $10 ($1,040 - $1,030). Therefore, it is not advisable to convert the bond and it is better to receive the call price of $1,040.

You Own a Bond That Has a Face Value of $1,000