CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
A convertible bond has a market price of $1,150, a conversion ratio of 40 shares, and its shares trade at $25. The bond's straight value is $950. The market conversion premium per share is closest to:
The market conversion premium per share is about $3.75. The market conversion price is the bond price of $1,150 divided by 40 shares, or $28.75, and subtracting the current share price of $25 leaves the premium paid to hold the convertible rather than the shares.
- A$3.75Correct
- B$4.17
- C$8.75
Explanation
Market conversion price = 1,150/40 = $28.75. Premium per share = 28.75 − 25 = $3.75. The $8.75 figure wrongly uses the bond's par-based conversion price or other base; $4.17 uses the premium over straight value divided by an incorrect base.
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