CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
A convertible bond has a par value of 1,000 and a conversion ratio of 25 shares. The bond trades at 1,150 and the shares trade at 40. The bond's market conversion premium ratio is closest to:
The market conversion premium ratio is about 15.0%. Conversion value is 25 x 40 = 1,000, so the market conversion price is 1,150/25 = 46, a 6 premium over the 40 share price, and 6/40 equals 15.0%.
- A10.0%
- B15.0%Correct
- C31.3%
Explanation
Conversion value = 25 x 40 = 1,000. Market conversion price = 1,150 / 25 = 46. Premium per share = 46 - 40 = 6. Premium ratio = 6 / 40 = 15.0%. Equivalent: 1,150/1,000 - 1 = 15%. The 10.0% figure wrongly uses par-based reasoning, and 31.3% mistakenly divides by the wrong base.
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