Question

A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at 5 points above parity, they are priced at:

Answer 1

Answer:

$1,060.5

Explanation:

A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at 5 points above parity, they are priced at:

Parity price refers to the concept of comparing two assets equal in value

The bond is convertible into 40 shares of common stock. The parity price is  bond market value / 40 shares.

Parity = Equal value, hence one bond value =  one share value x 40 shares

Bond value 25.25 x 40 = $1,010

Therefore 5 points above parity = 1.05 x 1,010 = $1,060.5

Answer 2

Answer: 106

Explanation:

Here, we are looking at the price it becomes profitable for investors to convert their bonds into common stock.

Using Parity pricing, which allows us to make comparison between stock of equal value,

Current market price of common stock =$25. 25

Stock is convertible in 40 shares of stock, Therefore,

Parity price of bond = current price * number of shares

Parity price = 25.25 * 40 = $1010

Trading point = 5

1 point equivalent to $10

5 points = $50

This sums up to;

$1,010 + $50 = $1,060

Therefore, price per bond = 106