A firm currently has outstanding a 9 percent, $1,000 convertible bond. The bond is convertible into 100 shares of common stock at a conversion price of $10 per share and callable at $1,090. The current market price of the firm's stock is $12 per share. The bond holder will ________.

Question

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The bondholder would choose to convert the bond into stock as it allows them to realize $200 over the par value ($10 * 100 shares - $1,000 bond value = $200). This is more favorable than allowing the call to be exercised, which would only result in a $90 profit over par value ($1,090 call price - $1,000 bond value = $90). Waiting for the stock price to go up further may or may not be a good strategy, as it is uncertain if the price will rise above the conversion price of $10 per share.

A Firm Currently Has Outstanding a 9 Percent, $1,000 Convertible