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Suriya7
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Asked: 2023-09-11T20:38:56+05:30 In:

Convertible Bond

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Convertible Bond

Please explain how to calculate the conversion ratio, price, value and premium

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    1 Answer

    1. GOPAL456789
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      1. Conversion Value:
      The conversion value of a convertible bond is the value at which the bond can be converted into common stock. It is calculated as follows:

      Conversion Value = (Number of shares that can be obtained upon conversion) × (Stock Price at Issue)

      In this case, the bond has a $1,000 par value and a convertible price of $1,050, so the number of shares that can be obtained upon conversion is 1,0001,0501,0501,000​. The stock price at issue is $80.

      Conversion Value = 1,0001,0501,0501,000​ × $80 = $76.19 (approximately)

      So, the calculated conversion value is not $937.50, but rather approximately $76.19.

      2. Market Conversion Premium per Share:
      The market conversion premium per share is the amount by which the bond’s conversion price exceeds the current market price of the common stock. It is calculated as follows:

      Market Conversion Premium per Share = (Convertible Price 2 April 2017 – Stock Price at Issue)

      Market Conversion Premium per Share = $1,050.00 – $80.00 = $970.00

      So, the calculated market conversion premium per share is indeed $970.00.

      Based on the calculations, Hamilton’s conversion value calculation is incorrect, so the answer is:

      B. No. The conversion value is incorrect.

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