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Basic Question 5 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 market conversion premium ratio of this bond?
B. 13.8%
C. 14.3%
A. 7.8%
B. 13.8%
C. 14.3%
User Contributed Comments 9
| User | Comment |
|---|---|
| oluji | this can't be right! it should be (57.14-48.95)/48.95 = 16.7%; or am I missing something? |
| ehc0791 | if the conversion price is the stated conversion price then b is correct |
| ssradja | Hmmmmm.... that is interesting. So, there is difference bn stated and market conversion price?! |
| HenryQ | Two terms exist: conversion price and market conversion price. For the first, use par/con ratio, for the second use mkt price/con ratio. |
| bmeisner | HenryQ: No one uses this term "market conversion price" because no one would ever choose to convert a bond if the conversion value is less than par (except in extreme cases such as illiquidity). In fact, if the stock is easily borrowable and the dividend yield is low then like a normal call option it is not adventageous to convert the bonds even when the stock price is way above the conversion price until maturity or if they are called. So basically CFA Institute is making up terms as they go here, I've also never heard of "market conversion premium ratio". I should know, I trade convertible bonds! |
| business | why the conversion ratio is different? A previous question uses 975, this one uses 1000. |
| gregsob2 | business has a good point here |
| davidt876 | yea i'm completely lost |
| davidt876 | ight, the difference is between the conversion price (at issue so using par) and the -market- conversion price (using the bond's current price) |
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Tamara Schultz
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.