conversion premium

CFA Level II Fixed Income
#1

i am getting much confused while solving a question.

“Mr. Alez was analyzing a convertible bond priced at $1055 and that has a conversion ratio of 7 share per convertible bond. Currentlystock is traded at $135. The bond pays cupon $50 and the stock is expexted to pay $3.5 per share annually”

question :

what was the market convrsion premium per share for the convertible bond ?

  1. $35
  2. $30
  3. $25

My solution :

Market conversion price = (1055/7) = $150.71

Market conversion premium per share = $150.71-$135 = $15.71

But this number is not in the option.

Thanks in advance

NB; This question is taken from a local third party provider

#2

The author of the question blew it.

Do they provide the “correct” answer and an explanation?

#3

The correct answer is given here as “B” without any explanation.

#4

Ignore this question; you’re doing it correctly; they’re not.

#5

s2000magician Thanks a lot

#6

You’re quite welcome.

#7

Just a quick thing, since i got confused myself on this one: the conversion price =/= the convertible bond price

Convertible bond price = Market price of convertible bond / Ratio

Conversion price = Par value / Ratio

The conversion price is the one used as a benchmark in order to measure the risk-return profile (busted convertible, hybrid or equity equivalent) of a convertible bond. If the price of stock is below the conversion price, the convertible bond price = conversion price.

#8

OMG! i almost got a heart attack when I did not see 15.71 :slight_smile: