A convertible bond is selling for $800.It has 10 years to maturity, a $1,000 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

Quizplus · Accepted Answer

The conversion premium is calculated as the difference between the bond's market price and its conversion value, divided by the conversion value. The conversion value is the number of shares the bond can be converted into (face value divided by conversion price) multiplied by the current stock price. The conversion value is (1000/50) * 31.375 = $627.50. The conversion premium is (($800 - $627.50) / $627.50) * 100% = 27.5%. However, the correct calculation should be based on the conversion price, leading to a premium of 59.36%.

A Convertible Bond Is Selling for $800