Question

A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at parity, they are priced at: A 100 B 101 C 106 D 107

Answer 1

B. 101

Step-by-step explanation:

First, we establish that the bonds are convertible into common stock of 40 share.

Secondly, the established current market price of the common stock is $25.25.

Therefore, calculate the Market price of the bonds upon conversion to stock

= 40 shares x $25.25 = $1,010

The bonds are trading at parity, therefore, they will be priced as follows;

Market Price x Conversion Ration (10%)=

$1,010 x 10 % = $1,010 x 0.10

= $101

N.B. Parity Price: this represents the price at which to assets are said to be equal in value. In our question, the parity price is the price at which the Convertible bonds are said to be equal in value to common stock shares and this price is the most beneficial point for such convertible bonds to be converted to common stock

Answer 2

(B) 101

Step-by-step explanation:

The bonds are convertible into 40 shares of common stock.

The current market value of the common stock is $25.25

The parity price of the bonds will be 40 x $25.25 = $1,010.

The bonds are trading at parity so they are priced at $1,010 = $1,010

Per bond = 101.