A firm issues the convertible debt shown above. The price of stock in this company on July 1, 2008 is $6.00. What is the minimum call price that would make a bondholder prefer to accept the call rather than convert?

Question

Quizplus · Accepted Answer

In order for a bondholder to prefer accepting the call rather than converting, the call price must be higher than the conversion value.

Conversion value = $50 × 6 = $300 
Par value + interest = $1,000 + ($50 × 6) = $1,300 
Minimum call price = $1,300 × 1.08 = $1,404

Therefore, the minimum call price that would make a bondholder prefer to accept the call rather than convert is par plus 8% or choice C.

A Firm Issues the Convertible Debt Shown Above