Question

Consider a Tesla convertible note with a $1,000 par value that is convertible into Tesla common stock. It has a coupon of 6%, payable annually. The bond is priced at $990. This convertible bond has a conversion ratio of 20. The current stock price is $40 per share. What is the conversion value of the bond? What is the conversion premium of the bond?

Answer 1

The conversion value of the bond is $800 and the conversion premium is $190.

Step-by-step explanation:

The conversion value of the bond is the value that the bondholder would receive if they converted the bond into Tesla common stock. To calculate it, multiply the conversion ratio by the current stock price:

Conversion value = Conversion ratio × Stock price

In this case, the conversion value is 20 × $40 = $800.

The conversion premium of the bond is the difference between the market price of the convertible bond and its conversion value:

Conversion premium = Bond price - Conversion value

In this case, the conversion premium is $990 - $800 = $190.