Question

Anna Conda purchased a $1000 par value, 9% coupon, 15-year, convertible bond for $1360 with a conversion price of $20. If the common stock is currently selling for $24.00, what is the conversion premium?

A)$40
B)$60
C)$120
D)$160
E)$180

Answer 1

The conversion premium for a convertible bond purchased for $1360, with a conversion price of $20 and current stock price of $24.00, is $160.

Step-by-step explanation:

The student is asking about how to calculate the conversion premium of a convertible bond. The conversion premium is the amount by which the price of a convertible bond exceeds its conversion value. In this case, to find the conversion premium, you need to determine how many shares the bond can be converted into and then calculate the difference between the bond's cost and the value of the stock if converted.

Each bond can be converted into shares of common stock at a conversion price of $20. Therefore, $1000 (par value) / $20 (conversion price) = 50 shares. The current stock price is $24.00, making the conversion value 50 shares * $24.00/share = $1200.

Anna Conda purchased the bond for $1360, so the conversion premium is $1360 - $1200 = $160. Therefore, the correct answer is D) $160.