Looper Industries bonds have a face value of $1,000 and can be exchanged for 30 shares of stock.The stock is selling for $35 a share.Looper has an outstanding call option on the bonds at $1,040.If the bonds are called,the holders must either convert or surrender their bonds.What should be the current market value of one of these bonds if the option premium per bond is $15? Assume the bond coupon rate equals the market rate of interest at time of call.
A)$1,040
B)$1,065
C)$1,025
D)$1,030
E)$1,035

Question

Quizplus · Accepted Answer

The current market value of the bond should be the greater of the conversion value or the call price plus the option premium. The conversion value is 30 shares * $35/share = $1,050. The call price is $1,040, and adding the option premium of $15 gives $1,055. Since $1,050 (conversion value) is less than $1,055 (call price plus option premium), the correct value is $1,055. However, there's a slight mistake in my calculation: the correct approach should compare the conversion value directly to the call price without adding the option premium to the call price. The correct market value is the higher of the conversion value ($1,050) or the call price ($1,040), which is $1,050, plus the option premium of $15, totaling $1,065.

Looper Industries Bonds Have a Face Value of $1,000 and Can