Final answer:
The conversion premium is the difference between the bond's market price and the market value of the shares it can be converted into. In this case, with a current bond market price of $908 and the shares valued at $638.25, the conversion premium is $269.75.
Step-by-step explanation:
The conversion premium of a convertible bond is the amount by which the price of the convertible bond exceeds the current market value of the shares it can be converted into. To calculate the conversion premium, you first determine the market value of the shares that the bond can be converted into by multiplying the conversion ratio (number of shares the bond can convert into) by the current price per share of the stock. Next, you subtract this value from the current market price of the convertible bond.
Given the current price of the issuing company's stock at $17.25 and the conversion ratio of 37 shares, the market value of the shares upon conversion is 37 shares × $17.25 = $638.25. The bond is currently priced at $908. Therefore, the conversion premium is $908 - $638.25 = $269.75. This means that the bond is trading at a premium of $269.75 over the value of the shares it could be converted into.