Convertible Bonds: Conversion Price

CFA Level II Fixed Income
#1

Hi, simple question. CFA curriculum, reading 44, BB example #9, Question 1:

Conversion Price = Price of Convertible bond / Conversion Ratio.

The answer given uses the issue price of the bond (par) as the price of the convertible bond, and not the market convertible bond price. Is this correct? The example in the text uses the market convertible bond price, and not the issue price.

thanks

#2

I would be interested in the answer as well. Looks like Schweser uses the market price too.

#3

You may be conflating the conversion price (which is calculated using the par value of the bond) and the _ market conversion price _ (which is calculated using the _ market value _ of the bond).

#4

Hi S2000 - thats it. I initially thought these were one in the same. Thanks for this.

#5

You’re welcome.

#6

So, in the formula:

Conversion price: Price of convertible bond / conversion ratio do we use par value or market value for the price of convertible bond?

#7

Par value.

#8

Thank you.

#9

My pleasure.

#10

I struggle with this concept. Could someone give me a few examples and explanations please (with Vstraight etc.)?

If the market price is close to the conversion Price (Price of Convertible bond / Conversion Ratio), we can identify a stock-like behavior.

On the other hand, we are talking about a bustible convertible if the conversion price is nowhere near (and below) the stock price.

Thanks a lot!