Question

A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $32 per share. If the bond's market price increases by 12.5%, the parity price of the stock will be:a. $32b. $36c. $37.50d. $38.40

Answer 1

Answer:

correct option is b. $36

Explanation:

given data

bought = $1,000 par convertible

convertible into common = $32 per share

bond market price increases = 12.5%

solution

we know that conversion ratio is fixed when the convertible security are issued and it does not change

we have bond is issued with a conversion price = $32

so as per each bond converting conversion ratio will be

conversion ratio =  $\frac{1000}{32}$ = 31.25 : 1

so by every bond which is converted , then receives  = 31.25 share

so now bond price will be = $1125

parity price of the stock will as = $\frac{1125}{31.25}$

parity price of the stock  = $36

correct option is b. $36