SIE practice questionhardCorporate Bonds — Convertible Bond Parity
A convertible bond with a conversion ratio of 25 is trading at $1,200. The underlying common stock is trading at $44. What is the parity price of the bond?
- A$1,200
- B$1,100✓ Correct answer
- C$1,000
- D$1,250
Explanation
Why B — $1,100
Bond parity = conversion ratio x stock price = 25 x $44 = $1,100. The bond is trading at $1,200, which is $100 above parity ($1,100). This $100 premium represents the value investors place on the bond's fixed income features (coupon payments and downside protection) above its pure conversion value.
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