If a $1,000 convertible bond with a market value of $950 has a conversion ratio of 25 when the firm's stock is selling for $36 per share, then:
A)The bond will be converted immediately
B)The bond is violating its "price floor"
C)Conversion now would give the investor a profit of $900
D)The conversion value of the bond is $900

Question

Quizplus · Accepted Answer

The conversion value of a convertible bond is the market value of the common stock that can be received by converting the bond. In this case, the conversion value of the bond is 25 * $36 = $900. Since the market value of the bond is $950, it is not violating its "price floor" and the investor would not convert it immediately. However, if the investor decides to convert the bond, they would receive common stock worth $900, which would result in a profit of $950 - $900 = $50. Therefore, option D is correct.

If a $1,000 Convertible Bond with a Market Value of $950