Final answer:
When the firm's stock price exceeds the bond's conversion price, the value of a convertible bond generally exceeds both its floor value and its conversion value due to the potential for profitable conversion.
Step-by-step explanation:
The value of a convertible bond when the firm's stock price exceeds the bond's conversion price generally exceeds both the bond's floor value and its conversion value. This is due to the added benefit of potential conversion into the firm's stock at a price lower than the current market value.
The floor value is the minimum value of the bond, representing its worth as a straight bond without conversion. The conversion value is determined by the current stock price multiplied by the conversion ratio. If the stock's price is high, the conversion value will exceed the bond’s floor value, thus making the bond more valuable.
Considering market interest rates, when they fall, bonds previously issued at higher rates will sell for more than face value, based on present value calculations that incorporate the missing capital gains. Conversely, when interest rates rise, such bonds sell for less than their face value.