The data given below relates to a convertible bond: Face value 1,000 Coupon rate 12% No. of shares per bond 20 Market price of share 48 Straight…
CA Final · Advanced Financial Management · RTP · May 2026
The data given below relates to a convertible bond: Face value 1,000 Coupon rate 12% No. of shares per bond 20 Market price of share 48 Straight value of bond 940 Market price of convertible bond 1,060 Calculate: (i) Stock value of bond. (ii) The percentage of downside risk. (iii) The conversion premium (iv) The conversion parity price of the stock.
Suggested Answer and Working Notes:
(i) Stock value or conversion value of bond 48 × 20 = 960 (ii) Percentage of the downside risk (1060-940) / 940 = 0.1277 or 12.77% or (1060-940) / 1060 = 0.1132 or 11.32% This ratio gives the percentage price decline experienced by the bond if the stock becomes worthless. (iii) Conversion Premium (Market Price - Conversion Value) / Conversion Value × 100 (1060-960) / 960 = 10.42% (iv) Conversion Parity Price Bond Price / No. of Shares on Conversion 1060 / 20 = 53 This indicates that if the price of shares rises to 53 from 48 the investor will neither gain nor lose on buying the bond and exercising it. Observe that - 5 (₹ 53 - 48) is 10.42% of 48, the Conversion Premium.
Topics: Security Valuation
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