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    Convertible bond: Will the holder convert or wait?

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    A firm currently has outstanding a 9 percent, $1,000 convertible bond. The bond is convertible into 100 shares of common stock at a conversion price of $10 per share and callable at $1,090. The current market price of the firm's stock is $12 per share. The bond holder will most likely:

    Allow the call to be exercised realizing $90 over par value,
    Convert the bond into stock realizing $200 over par value,
    Convert the bond into stock realizing only par value, or
    Do nothing and wait until the stock price goes up further.

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    The solution explains the calculation to the convertible bond.

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