### CFA Practice Question

There are 252 practice questions for this study session.

### CFA Practice Question

A 10-year, 8% coupon convertible bond is currently trading at 97.50. 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 premium ratio of this bond?

A. 7.8%
B. 13.8%
C. 14.3%

Conversion ratio = 1000/57.14 = 17.5. Market conversion price = \$975 per \$1000 / 17.5 = \$55.71
Market conversion premium = 55.71 - 48.95 = \$6.76
Market conversion premium ratio = \$6.76 / \$48.95 = 13.8%

User Comment
oluji this can't be right! it should be (57.14-48.95)/48.95 = 16.7%;

or am I missing something?
ehc0791 if the conversion price is the stated conversion price then b is correct
ssradja Hmmmmm.... that is interesting. So, there is difference bn stated and market conversion price?!
HenryQ Two terms exist: conversion price and market conversion price. For the first, use par/con ratio, for the second use mkt price/con ratio.
bmeisner HenryQ: No one uses this term "market conversion price" because no one would ever choose to convert a bond if the conversion value is less than par (except in extreme cases such as illiquidity). In fact, if the stock is easily borrowable and the dividend yield is low then like a normal call option it is not adventageous to convert the bonds even when the stock price is way above the conversion price until maturity or if they are called. So basically CFA Institute is making up terms as they go here, I've also never heard of "market conversion premium ratio". I should know, I trade convertible bonds!
business why the conversion ratio is different? A previous question uses 975, this one uses 1000.
gregsob2 business has a good point here
davidt876 yea i'm completely lost
davidt876 ight, the difference is between the conversion price (at issue so using par) and the -market- conversion price (using the bond's current price)