Question

Maple Aircraft has issued a convertible bond at 4.75% interest due 2030. The market price of the convertible is 91% of face value (face value is $1,000), and the conversion ratio is 20. Assume that the value of the bond in the absence of a conversion feature is about 80% of face value.

1) What is the conversion price?

2) How much is the convertible holder paying for the option to buy one share of common stock?

Answer 1

Given,

Face value = $ 1000

Market price rate = 91%

Conversion ratio = 20

Solution :-

Conversion Price Face Value Conversion ratio $1000 = $50 rate a market Price of bond (m) - Face Value x market Price = $1000 x 91% - 8910

Value of feature = bond in absence of conversion. Face Value X 80% = $ 1000 x 8oy. = $800 Now, Price of common Stock M - Ve Conversion ratio & 910 – $800 20 a = $5.50 Thus, the convertible holder is paying for the option to buy one share of common stock is $5.50