A 10-year convertible bond has a face value of $1,000 and pays an annual coupon

Question

A 10-year convertible bond has a face value of $1,000 and pays an annual coupon of $50. The bond's conversion price is $40. The issuing company's stock currently trades at $30 a share. The company can issue straight (non-convertible) debt with an 8% yield. Which of the following statements is CORRECT?

a. The bond's conversion ratio is 20.

b. The bond's conversion value is currently $750.

c. The bond's straight-debt value is $750.

d. The bond's straight-debt value is $1,000.

e. The convertible bond should sell for less than $750.

Explanation / Answer

b. The bond's conversion value is currently $750. this is correct as as conversion price is $40 and and each share trades for$30

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