Corporate Debt Calculations
Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the debenture is trading at 94. The stock is trading at 80. What is the conversion price of the stock?
$100 The bond is convertible into a common at a 10:1 ratio, based on the par value of the bond. The conversion price formula is the par value ($1000) divided by the conversion ratio
Ford Motor Company has issued 8% convertible debentures, convertible at a 50:1 ratio. Currently the debenture is trading at 110. The stock is trading at 21. What is the conversion price of the stock?
$20 The bond is convertible into common at a 50:1 ratio, based on the par value of the bond. The conversion price formula is: Par value or bond/ conversion ratio = conversion price. $1,000/50 = $20
A corporation has issued 10%, $1,000 par convertible debentures, convertible at $100. The common stock is currently trading at $90. If the bond and the common are trading at parity, a customer purchasing 5M of the bond will pay:
$4,500 Each bond converts into 10 shares (1000/100 conversion price) if the common is trading at $90, the bond must be trading at 10 times this to be at parity. 90 *10 = 900 parity price of one bond. The parity price of "5m" is 900 * 5 = 4500.
The conversion price of a convertible debenture is set at $40 per share. The common stock is now trading at $42 while the bond is trading at 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be: $44
$44 Since the bond is now trading at 110 ($1,100 per bond) each bond is convertible into 25 common shares, the parity price of the common is $1,100 / 25 =$44 Since the common is currently trading at 42, it is below parity and it does not make sense to convert. It only makes sense to convert if the common is trading above parity
A corporation has issued 10% convertible debentures, convertible into 40 shares of common stock. The current market price of the common stock is $25.25. If the bonds are trading at 10 points above parity, they are priced at:
111 Parity price of the bonds is 40 * $25.25 = $1,010. Since the bonds are trading at 10 points ($100) above parity, they are priced at $1,010 + $100 = $1,110 per bond = 111.
A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $31.25 per share. If the bond's market price increases by 20%, the conversion ratio will be:
32.00:1 The conversion price (and hence the conversion ratio) is fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $31.25, based upon converting each bond at par. $1,000 par / 31.25 conversion price = 32:1 conversion ratio. Thus, for every bond that is converted, the holder receives 32 shares.
Ford Motor Company has issued 8% convertible debentures, convertible at a 12.5:1 ratio. Currently the debenture is trading at 90. The stock is trading at 90. The stock is trading at $72. Which statement is True?
A bond is trading at parity with the stock The bond is convertible into 12.5 shares of stock, now trading at $72, for a conversion value of $900 (72 * 12.5 = 900). Since the bond is trading at 90 ($900), the stock and the bond are trading at parity to each other.
ACME Company has issued 8% convertible debentures, convertible at a 100:1 ratio. Currently the debenture is trading at 102. The stock is trading at $9. Which statement is True?
The conversion price is $10.00 and the parity price of the common stock is $10.20 $1000 par / 100 shares per bond = $10 conversion price. Thus, each bond is convertible into 100 shares of common stock at $10 each. If the bond is now trading at 102, or $1,020, the common stock's parity price is $1020 / 100 shares per bond = $10.20. Since the common stock is trading at $9 per share, it is trading below parity
A convertible debenture is convertible into common at $50 per share. If the market price of the bond rises to a 25 point premium over par, which statement is true?
The conversion ratio is 20:1 and the parity price of the stock is $62.50 The conversion ratio is $1,000 par/ 50 conversion price =20:1 (20 shares per bond). If the bond moves to a 25 point premium over par, its new price will be 125, or $1,250 per bond. For the common stock to be valued at parity to the bond, the price per share must be $1,250/20 per bond = 62.50 per share parity price
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 statement is True?
The conversion ratio is 25:1 and the parity price of the stock is $42 $1,000 par/$40 conversion price = 25:1 (25 shares per bond). If the bond moves to a 5 point premium over par, its new price will be 105, or $1,050 per bond. For the common stock to be valued at parity to the bond, the price per share must be $1,050/25 shares per bond = $42 per share parity price.
