Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct?
I. The value of the conversion option for bond A is $125.
II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.
III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.
A) II only
B) I and III only
C) III only
D) I, II, and III

Question

Quizplus · Accepted Answer

I. Value of conversion option = $1,245 − $1,120 = $125
II. The lower yield on the bond that differs only in it conversion feature indicates that the bond is priced according to its conversion value, not its straight debt value.
III. $1,245/$49.80 = $25

Suppose You Find Two Bonds Identical in All Respects Except