Question

Maple Aircraft has issued a convertible bond at 4.75% interest due 2020. The market price of the convertible is 93% of face value (face value is $1,000). The conversion price is $45. Assume that the value of the bond in the absence of a conversion feature is about 63% of face value. How much is the convertible holder paying for the option to buy one share of common stock?

Answer 1

The convertible holder paying for the option to buy one share of common stock is $13.63

Step-by-step explanation:

According to the given data we have the following:

Value of convertible bond=93%*1,000=$930

Value of straight bond=63%*1,000=$630

Value of warrants=$300

Hence, number of warrants per bond=$1,000/$45

number of warrants per bond=22

Therefore, price of one warrant=$300/22

price of one warrant=$13.63

The convertible holder paying for the option to buy one share of common stock is $13.63