IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies
Asha Textiles issued a Rs 1,000 face value convertible bond convertible into 20 ordinary shares. The shares currently trade at Rs 40. What is the conversion price per share, and the current conversion value of one bond?
The conversion price is Rs 50 (face value Rs 1,000 divided by 20 shares) and the conversion value is Rs 800 (20 shares at Rs 40 each), so conversion is currently out of the money.
- AConversion price Rs 50; conversion value Rs 800Correct
- BConversion price Rs 40; conversion value Rs 800
- CConversion price Rs 50; conversion value Rs 1,000
- DConversion price Rs 20; conversion value Rs 800
- Conversion price Rs 50; conversion value Rs 1,250
Explanation
Conversion price = 1,000 / 20 = Rs 50. Conversion value = 20 x 40 = Rs 800. Using the market price as conversion price gives Rs 40, which wrongly ignores the ratio from face value.
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