Assist the holder of a 1000 par value convertible bond in de

Assist the holder of a $1,000 par value convertible bond in determining whether to convert, given that the conversion ratio is 15.5 and that the stock is currently selling for $70 per share. Calculate both the bond value and conversion value.

Solution

conversion value = market price of common stock × conversion ratio

= $70 * 15.5

= $1085

The bond will sell for the conversion value of $1,085. Assuming that interest rates have not changed, the floor of bond value would be $1,000, even if stock price declines below $64.52 ($1000 / 15.5 = $64.52).