FMP practice questions doubt

shankar.venkatraman15
Posts: 1
Joined: Mon Feb 08, 2016 3:51 am

FMP practice questions doubt

Postby shankar.venkatraman15 » Sat May 07, 2016 2:03 pm

Hi, I have a doubt in answering this question from the practice module of Edupristine. Can you please help me out? Thank you

1. A corporate bond with face value of $100 is convertible at $40 at a conversion rate of 2.5 shares per bonds and the corporation has called it for redemption at $106. The bond is currently selling at $115, and the stock’s current market price is $45. Which of the following would a bondholder most likely do?
Choose one answer.

a. Sell the bond 


b. Convert the bond into common stock 


c. Allow the corporation to call the bond at 106 


d. None of the given statements 

edupristine
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Joined: Wed Apr 09, 2014 6:28 am

Re: FMP practice questions doubt

Postby edupristine » Thu May 19, 2016 9:31 am

Hi Shankar

The correct answer is A: Sell the bond.
Solution:
The conversion rate is expressed here in terms of the conversion price. The conversion rate for this bond is $100 into $40, or 1 bond into 2.5 shares.
Immediate conversion will yield 2.5 × $45 = $112.5. The call price is $106. Since the market price is higher than the call price and the conversion value, and the bond is being called, the best value is achieved by selling the bond at the market rate of $115.


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