CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

A 10-year, 8% coupon, $1000 par value convertible bond is currently trading at $975. 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 price of this bond?
A. $50.60 per share.
B. $53.85 per share.
C. $55.71 per share.
Explanation: Conversion ratio: 1000/57.14 = 17.5.Market conversion price: 975/17.5 = 55.71 per share.

User Contributed Comments 5

User Comment
Allen88 I thought of it this way. If the market price of the bond were trading at $1000 (par) then the conversion price would be $57.14. The market price of the bond is 975, so the conversion price should trade at (975/1000) * $57.14. Doing it this way is mathematically equivalent to the answer provided above but it may be easier to interpret.
Paulvw Good way to remember, Allen.
soorajiyer Thanks Allen88, makes it much easier!
Mikehuynh Brilliant Allen88
brave1986 The Market conversion price for me is simply what you would assuming you converted the bond at its market price
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