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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

A company has a 9% convertible loan stock, each ₹100 nominal convertible into 5 ordinary shares at the holder's option. The shares trade at ₹24. What is the current conversion value per ₹100 nominal, and what does it imply?

Conversion value is 5 shares times ₹24, which is ₹120 per ₹100 nominal. Because holders could convert and sell the shares, the convertible's market price should not fall below this value, which acts as a floor.

  1. A₹120; the stock should trade at no less than this, because holders could convert and sellCorrect
  2. B₹120; the stock must be redeemed immediately at this value
  3. C₹100; conversion value always equals nominal value
  4. D₹24; conversion value equals one share price
  5. ₹120; the coupon falls to nil if the holder converts later

Explanation

Conversion value = 5 × ₹24 = ₹120. The market price of convertible stock should not fall below this floor, otherwise arbitrage by buying, converting and selling shares would be possible. It carries no obligation to redeem early.

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