The data given below relates to a convertible bond: Face value 250 Coupon rate 12% No. of shares per bond 20 Market price of share 12 Straight value…
CA Final · Advanced Financial Management · MTP · May 2026
The data given below relates to a convertible bond: Face value 250 Coupon rate 12% No. of shares per bond 20 Market price of share 12 Straight value of bond 235 Market price of convertible bond 265 Calculate: Stock value of bond.The percentage of downside risk.The conversion premiumThe conversion parity price of the stock.
Suggested Answer and Working Notes:
Stock value or conversion value of bond 12 × 20 = 240 Percentage of the downside risk (₹ 265 -235) /235 = 0.1277 or 12.77% or (₹ 265 -235) /265 = 0.1132 or 11.32% This ratio gives the percentage price decline experienced by the bond if the stock becomes worthless. Conversion Premium (Market Price - Conversion Value) / Conversion Value × 100 (₹ 265 -240) /240 × 100 = 10.42% Conversion Parity Price Bond Price / No. of Shares on Conversion 265 / 20 = 13.25 This indicates that if the price of shares rises to 13.25 from 12 the investor will neither gain nor lose on buying the bond and exercising it. Observe that - 1.25 (₹ 13.25 - 12.00) is 10.42% of 12, the Conversion Premium.
Topics: Security Analysis
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