What is the value of a convertible bond with a conversion ratio of 25, face value of $1,000, coupon of 10% and yield of 10 percent? Common stock of this firm is currently selling at $35.
A)$875
B)$1,000
C)$1,125
D)$1,875

Question

Quizplus · Accepted Answer

The value of a convertible bond can be calculated as the greater of its investment value or its conversion value. The investment value is the present value of its future cash flows (coupons and principal) discounted at the current yield. Since the coupon rate equals the yield, the bond's investment value is equal to its face value, which is $1,000. The conversion value is the current value of the shares for which the bond can be exchanged, calculated as the current stock price multiplied by the conversion ratio (25 shares * $35 = $875). Since the investment value ($1,000) is greater than the conversion value ($875), the value of the convertible bond is $1,000.

What Is the Value of a Convertible Bond with a Conversion