Question

A convertible debenture is convertible into common at $40 per share. If the market price of the bond rises to a 5 point premium over par, which statements are TRUE

Answer 1

II The conversion ratio is 25:1

Step-by-step explanation:

the options were missing:

I The conversion ratio is 20:1

II The conversion ratio is 25:1

III The parity price of the stock is $44

IV The parity price of the stock is $50

the conversion ratio gives us the total number of stocks that can be converted. In this case, the conversion ratio = 25, since $1,000 (par value) / $40 per stock = 25 stocks

Since the bond's price increases by 5%, it will be $1,050 / 25 stocks = $42, so the stock's price parity = $42