- CFA Exams
- CFA Level I Exam
- Study Session 13. Fixed Income (2)
- Reading 34. Valuation and Analysis of Bonds with Embedded Options
- Subject 8. Valuation and Analysis of Convertible Bonds

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**CFA Practice Question**

A 10-year, 8% coupon, $1,000 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 conversion value of this bond?

A. 73.65

B. 85.66

C. 92.46

**Explanation:**Step 1. Compute conversion ratio: 1000/57.14 = 17.5.

Step 2. Conversion value = stock price x conversion ratio = 48.95 x 17.5 = 856.63, or 85.66 per $100.

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**User Contributed Comments**
6

User |
Comment |
---|---|

mazen1967 |
conversion ratio is bond price/conversion price |

Leese |
Market price/mkt conversion price, right? Not par value. I got 975/57.14=17.06 17.06*48.95=835.09/100=83.51 Is this correct? |

Offboard |
conversion ratio does not change with the price of the bond. It's fixed. So use par value instead of the fluctuating price. |

malawyer |
market conversion price = price / conversion ratio. Since the ratio is not given, you must first calc it as above. |

kazec |
Offboard, it's not like that. It's true that conversion ratio does not change. But conversion price changes with bond price, so still need to use market price/conversion price to find conversion ratio. |

darbyland |
Leese - the calculation should read 1000/57.14 = 17.5 = conversion ratio. If the question asks for conversion premium per share, you should be using 975/17.5 = 55.71 as the market conversion price and then subtract the given share price, instead of using 57.14 as the conversion price. |