On top of page 34 CFAI states “the current conversion price is the current stock price times the conversion ratio”
Then, in example 7 on page 37 in the solution to #2, it states that the conversion price is $24, or $1,200/50. (Current convertible bond price of $1,200 and conversion ratio of 50). In this problem, the stock price is given as $30, so why wouldn’t the conversion price be 50 * $30 = $1,500 ?
Any insights into this would be great, i just can’t seem to figure it out. I think the CFA has really messed up with convertible terminology from L2 -> L3. In L2, it was taught that conversion price = conversion ratio * strike, while the conversion value = conversion ratio * current stock price. Really need some clarification here. TIA.
I wrote to the CFA Institute to complain about this section but have received no reply. I suggest you write in to them as well and mention this. Seems candidates carry more weight when they lodge the errata.
“Hello!
Thanks for your inquiry and pointing out errors in the text.
We agree there were multiple errors in use of terms which makes the text incorrect.
We will make the required revisions and post an errata notice.
Good luck with your studies.
Best,
Curriculum Team”
Convertible bonds are hybrid securities that can be viewed as a combination of straight debt plus a long equity call option with an exercise price equal to the strike price times the conversion ratio <they removed the part where they called this the conversion value>. The conversion ratio is the number of shares for which the bond can be exchanged. The bond’s conversion value is the current stock price times the conversion ratio. The conversion price is the current convertible bond price divided by the conversion ratio.
If the current conversion value is significantly below the convertible bond price (or equivalently, the current share price is significantly below the conversion price), the call is out- of- the- money and the convertible bond will behave more like a straight bond.
Conversely, if the conversion value is significantly above the convertible bond price (or equivalently, the current share price is significantly above the conversion price), the call is in-the-money and the convertible bond will behave more like the underlying equity.
Are you sure they’ve updated? The institute says its updated, but then the link goes to the same old August 24 errata. So, I will use your paragraphs, but I cannot find that on the current errata that the institute claims is updated.
