Series 7 practice questionmediumDebt Securities — Corporate Bonds — Convertible
A convertible bond has a par value of $1,000 and is convertible into common stock at a conversion price of $40. If the common stock is currently trading at $45, what is the parity price of the bond?
- A$1,000
- B$800
- C$900
- D$1,125✓ Correct answer
Explanation
Why D — $1,125
The conversion ratio is $1,000 / $40 = 25 shares. Parity price is the conversion ratio multiplied by the current stock price: 25 x $45 = $1,125. When a convertible bond trades above its par value due to the underlying stock price, it is said to be trading at a premium and the bond's price is driven primarily by the value of the underlying equity.
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