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Hannon's Convertible Bonds

Hannon Home Products, Inc., recently issued $430,000 worth of 8 percent convertible debentures. Each convertible bond has a face value of $1,000. Each convertible bond can be converted into 28 shares of the firm's common stock anytime before maturity. The current price of Hannon's common stock is $31.25 per share, and the market value of each of Hannon's convertible bonds is $1,180. Answer the following questions related to Hannon's convertible bonds:

1. What is the conversion ratio?
2. What is the conversion price?
3. What is the conversion premium?
4. What is the conversion value?
5. If the value of Hannon's common stock increases by $2, what will the conversion value be?

Solution Preview

1. The conversion ratio is defined as the number of shares that will be issued upon conversion. Since each bond is convertible into 28 shares of Hannon's common stock, the conversion ratio of the convertible bonds is 28.

2. The conversion price is defined as the face amount of a convertible bond that the holder must surrender in order to receive a single share. ...

Solution Summary

The solution explains the various calculations relating to a convertible bond.