- 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
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 per share of this bond?
A. $5.42 per share.
B. $6.76 per share.
C. $8.19 per share.
Explanation: Conversion ratio: 1000/57.14 = 17.5.Market conversion price = $975 per $1000 / 17.5 = $55.71.
Market conversion permium = 55.71 - 48.95 = $6.76.
User Contributed Comments 2
| User | Comment |
|---|---|
| gregsob2 | why is it not simply 57.14 - 48.95? |
| brissio | the conversion price here is for a the bond at par. You need to adjust the conversion price to 975, which is 55.71. Never include the dividend. |