EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 6, Problem 3PROB
Summary Introduction
The convertible bonds have a face value of $1,000 which can be converted into 50 common shares. Current price of the stock is $19, and bond is $980.
Convertible bonds or debenture is a type of bond which has the option of converting the bonds to common shares. Each share price or the conversion price is determined by the face
When, the market price of the stock is more than the conversion price, then the bondholders can sell the stock and gain from the difference in price.
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Suppose you own a convertible bond that has a conversion ratio equal to 58. Each convertible bond has a face value equal to $1,000. The current market value of the company's common stock is $17, and the bond is selling for $1,036. If you want to liquidate your position today because you need money to pay your rent, should you sell the bond or should you convert the bond into common stock and then sell the stock? Explain your answer. Round your answers to the nearest dollar.
Selling the bond would generate $ . Converting the bond and selling the common stock would generate $ . Thus, it would be better to .
Suppose you own a convertible bond that has a conversion ratio equal to 62. Each convertible bond has a face value equal to $1,000. The current market value of the company's common stock is $16, and the bond is selling for $1,042. If you want to liquidate your position today because you need money to pay your rent, should you sell the bond or should you convert the bond into common stock and then sell the stock? Explain your answer. Round your answers to the nearest dollar.
Selling the bond would generate $_______ . Converting the bond and selling the common stock would generate $_______ . Thus, it would be better to SELL THE BOND / CONVERT THE BOND INTO COMMON STOCK AND THEN SELL THE STOCK
You bought a convertible bond issued by Zip Corp which has a conversion ratio of 50 common shares for each $1,000 bond.
A) At what stock price per share would you make a profit (“in the money”) if you bought the bond at par?
B) What would you expect the bond to sell for in the market if Zip Corp’s stock trades at $28.50 per share?
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