Question

A convertible debenture callable at 101 is trading at 105. The debenture carries 4% coupon and is convertible at $25. The common stock is trading at $27. If an investor bought the debenture and converted, the profit would be

Answer 1

If an investor bought the debenture and converted it, the profit would be $30.

First, calculate the number of shares each bond will convert to:

$1,000 (par) divided by $25 per share equals 40 shares per bond. With a market value of 105, each bond costs $1,050.

What is the stock parity price?

$1,050 divided by 40 shares equals $26.25 per share. The current market value of the stock minus stock parity price equals profit (or loss).

$27.00 − $26.25 = $0.75 per share × 40 shares = $30.

What is convertible debenture?

A long-term debt with the option to convert into stock shares after a predetermined amount of time is known as a convertible debenture. Common examples of convertible debentures include unsecured bonds or loans with little to no underlying security to back the commitment.

How are debentures converted to shares?

Equity shares are created out of a debenture. The holders of debentures are asked to return debenture certificates after sending them a notification of the conversion. The allocation of shares is handled by the secretary. Changes must be submitted to the Register of Charges after allotment.

Learn more about convertible debenture: brainly.com/question/16976826

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