A convertible bond is selling for $800. It has 10 years to maturity, a $1000 face value, and a 10% coupon. Similar nonconvertible bonds are priced to yield 14%. The conversion price is $50 per share. The stock currently sells for $31.375 per share. The conversion premium is:

Question

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The conversion premium is calculated as (Conversion Value - Bond Price) / Conversion Value. The conversion value is the number of shares the bond can be converted into (Face Value / Conversion Price) multiplied by the current stock price. Here, the conversion value is (1000/50) * 31.375 = $627.50. The conversion premium is ($627.50 - $800) / $627.50 = 27.5%, but since the bond price is higher than the conversion value, the premium is actually the percentage by which the bond price exceeds the conversion value, which is 59.36%.

A Convertible Bond Is Selling for $800