Jorge bought APJ Inc.’s convertible bond at par ($1,000) with a yield of 3.25%. This bond had a conversion ratio of 25:1 at the
price of $40 per share. If APJ Inc.’s shares are currently trading at $48 per share, should Jorge convert his bond into shares?
1 answer:
The total amount you receive is lower than the bond par value, so today you shouldn't convert.
Following are the calculation to the given question:
- At a <em><u>price of $40 per share</u></em><u>, </u>the bond had a 25:1 conversion ratio
- Total Conversion Value = $40 × 25 = $1,000
- The value of the Conversion is $1,000 which is the Par bond value.
- Present bond price = $35.
If today you're converting,
- Total receiving amount = $35 ×25 = $875
So, the total amount you receive is lower than the bond par value, so today you shouldn't convert.
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