Question

QUESTION 11 Jacques has a convertible bond with a par value of $1,000 that is trading in the market for $925. The bond is convertible into 50 shares of XYZ stock. The current market price of XYZ stock is 17.50 per share. What is the bond's conversion premium? O a. $0. b. $76 C. $50. d. $125.

Answer 1

11.

A conversion premium is the amount by which the price of a convertible security (bond) exceeds the current market value of the common stock into which it may be converted.

In this problem, current market price of bond = $925

The bond is convertible into 50 shares of XYZ Stock

Market Price of XYZ Stock = 17.50

Hence, current market value of the common stock = (50 * 17.50) = $ 875

Since, price of a convertible security ($925) does not exceed current market value of the common stock ($ 875) into which it may be converted, conversion premium = $0

Hence, Answer is Part A

12

We are required to calculate "Accrued Interest" of the bond between settlement date and the next coupon payment date

Semi-annual interest payment = $ 15

Hence, we can deduce that $15 accrues over a period of 180 days

No of days remaining between settlement date and the next coupon payment date = 120 days

Hence, interest accrued uptil now = ( (180 - 120) / 180 * $15) = (60 / 180 *15) = $5

Separately,

"Bid Price" represents the maximum price that a buyer is willing to pay and

"Ask price" represents the minimum price that a seller is willing to receive

Since, Eric desires to buy the bond, he is required to bid for the bond.

Hence, we may conclude that price which Eric has to pay will be

Option A : Bid Price plus $5 ( $5 represents Interest Accrued Uptil Now as shown in the above calculations).