SIE practice questionmediumCorporate Bonds — Convertible
A convertible bond has a par value of $1,000 and a conversion price of $50. What is the conversion ratio?
- A20 shares✓ Correct answer
- B100 shares
- C50 shares
- D10 shares
Explanation
Why A — 20 shares
Conversion ratio = par value / conversion price = $1,000 / $50 = 20 shares. This means each bond can be converted into 20 shares of the underlying common stock. The conversion ratio is fixed at issuance and determines the parity relationship between the bond and stock prices.
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