CFA Practice Question

There are 252 practice questions for this study session.

CFA Practice Question

Consider the following convertible bond:

Par value: $1,000
Coupon rate: 6%
Conversion ratio: 20
Market price: 1050
Straight value: 980

Underlying stock characteristics:

Current market price: $32 per share
Dividend yield: 4%

The risk-return characteristics of the convertible bond most likely resemble that of:
A. a busted convertible.
B. Trading Inc.'s common stock.
C. a hybrid instrument.
Explanation: Market conversion price = $1050/20 = $52.5 which is well above the market price of its common stock ($32).

User Contributed Comments 1

User Comment
njhpeyton I seem to be missing something here. It appears as though the option has a significant amount of value as it's trading well above the straight value. I thought a busted convertible was something FAR out of the money. How do we determine if it's far enough out of the money to be considered "busted"? This doesn't seem clear-cut
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