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blagie [28]
3 years ago
5

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
Business
1 answer:
Pachacha [2.7K]3 years ago
5 0

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

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