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 conversion ratio of this bond?

A. 15.8.
B. 17.1.
C. 17.5.

Conversion ratio = 975 / 57.14 = 17.06

User Comment
bmeisner The conversion price for a CB is never refered to as the bond's market price / CR it is par value / CR. In this case the conversion price (as I would call it if 57.14 is market conversion price) is 57.14 * (100/97.5) = 58.6. That means the CR is 1000/58.6 or ~ 17.1.
jmcarr02 "Conversion price = market price of the convertible bond / conversion ratio ". According to this statement, the conversion ratio should be: 975/57.14 = 17.06 (answer B)
dblueroom The number of shares that an investor will receive by exchanging the bond for the stock is pre specified in the prospectus. So this is really a backward question.
xiaoniu Conversion ratio: the number of shares of common stock that the bondholders receive from converting their bonds into shares.
davidt876 why is it 975 instead of 97.5?
michaelcfa the price of a bond is based on 1000. if trading at 97.5, the price is then 975.
CFAJ thanks michael