CFA Practice Question

There are 252 practice questions for this study session.

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.

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.
You need to log in first to add your comment.