FRM Part I · FRM Exam Part I · Corporate Bonds
A convertible bond has a face value of USD 1,000 and is convertible into 20 shares. The shares trade at USD 42, and the straight bond value (ignoring conversion) is USD 880. The bond trades at USD 960. What is the conversion premium as a percentage of conversion value?
The conversion value is 20 shares times USD 42, or USD 840. The bond trades at USD 960, a USD 120 premium. Divided by the conversion value of 840, the conversion premium is about 14.3%.
- A14.3%Correct
- B9.1%
- C20.0%
- D4.8%
Explanation
Conversion value = 20 × 42 = USD 840. Premium = 960 − 840 = 120. Percentage = 120/840 = 14.29%. Using the straight bond value (960 − 880 = 80, or 9.1% of 880) is a different measure, the premium over investment value, and is wrong here.
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