Question

A bond with a face value of​ $1000 is convertible to common stock at a conversion ratio of 60. If the stock is currently trading at $ 8 per​ share, the value of the bond is probably closest in value to which of the​ following?
A. about $1000
B. about $492
C. less than $492
D. about $508
E. above $1666

Answer 1

Answer: B. about $492

Explanation:

The Face value of bond is $1,000 The Conversion ratio is 60 and the current Stock price is $8.20 per share

The conversion ratio of 60 means that for each convertible bond, there would be 60 shares to be issued to the holder if they want to convert their bond to the shares.

Therefore, for one single bond, the number of shares to be issued is 60.

Calculating the closet value of the convertible bond will then be:

Value of the bond = Conversion ratio * Stock price

= 60 x $8.20

= $492.00

Therefore, the value of the bond is closet to $492.00.