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Bond Conversion

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5. An analyst has recently informed you that at the issuance of a company's convertible bonds, one of the two following sets of relationships existed:
Scenario A: Face value of bond $1,000; Straight Value of Convertible Bond: $900; Market Value of Convertible Bond: $1,000
Scenario B: Face Value of Bond: $1,000; Straight Value of Convertible Bond: $950; Market Value of Convertible Bond: $900
Assume the bonds are available for immediate conversion. Which of the two scenarios do you believe is more likely? Why

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Solution Summary

The solution explains how to determine if the bonds would be converted

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A convertible bond is a straight bond with conversion option and so the price of a convertible cannot be less than straight value of bond since the convertible bond ...

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