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Basic Question 4 of 10
A 10-year, 8% coupon convertible bond is currently trading at 97.50. The conversion price of the bond is 57.14. The underlying common stock of the same issuer is currently paying a dividend of $1.65 and is priced at 48.95. Which of the following would best estimate the conversion ratio of this bond?
B. 17.1.
C. 17.5.
A. 15.8.
B. 17.1.
C. 17.5.
User Contributed Comments 7
| User | Comment |
|---|---|
| bmeisner | The conversion price for a CB is never refered to as the bond's market price / CR it is par value / CR. In this case the conversion price (as I would call it if 57.14 is market conversion price) is 57.14 * (100/97.5) = 58.6. That means the CR is 1000/58.6 or ~ 17.1. |
| jmcarr02 | "Conversion price = market price of the convertible bond / conversion ratio ". According to this statement, the conversion ratio should be: 975/57.14 = 17.06 (answer B) |
| dblueroom | The number of shares that an investor will receive by exchanging the bond for the stock is pre specified in the prospectus. So this is really a backward question. |
| xiaoniu | Conversion ratio: the number of shares of common stock that the bondholders receive from converting their bonds into shares. |
| davidt876 | why is it 975 instead of 97.5? |
| michaelcfa | the price of a bond is based on 1000. if trading at 97.5, the price is then 975. |
| CFAJ | thanks michael |
I was very pleased with your notes and question bank. I especially like the mock exams because it helped to pull everything together.
Martin Rockenfeldt
Learning Outcome Statements
describe defining features of a convertible bond;
calculate and interpret the components of a convertible bond's value;
describe how a convertible bond is valued in an arbitrage-free framework;
compare the risk-return characteristics of a convertible bond with the risk-return characteristics of a straight bond and of the underlying common stock.
CFA® 2025 Level II Curriculum, Volume 4, Module 28.