Conversion of Bonds
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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 conversion of bonds are determined.
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First, the straight value of a convertible bond is what the convertible bond would sell for if it could not be converted into common stock.
Second, therefore it is more likely that ...
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