What is the minimum value of the call option on a convertible bond (with face value of $1,000) with a conversion ratio of 30 if the bond offers a 9% coupon, has 10 years until maturity, and market interest rates are 9% for comparable bonds? The stock is currently priced at $35.
A) $0
B) $5
C) $50
D)$65

Question

Quizplus · Accepted Answer

Bond value = $1,000 because coupon rate = market rateConversion value = 30 × $35 = $1,050Value of call = $1,050 - 1,000 = $50

What Is the Minimum Value of the Call Option on a Convertible