IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies
Sundaram Industries issued a convertible bond of face value ₹1,000 convertible into 20 equity shares. The shares currently trade at ₹38. What is the conversion price per share and the current conversion value of one bond?
The conversion price is ₹50 (₹1,000 divided by 20 shares) and the conversion value is ₹760 (20 shares at the current market price of ₹38). The conversion price is fixed by the terms; the conversion value moves with the share price.
- AConversion price ₹50; conversion value ₹760Correct
- BConversion price ₹50; conversion value ₹1,000
- CConversion price ₹38; conversion value ₹760
- DConversion price ₹20; conversion value ₹760
- Conversion price ₹50; conversion value ₹1,900
Explanation
Conversion price = face value / number of shares = 1,000/20 = ₹50. Conversion value = 20 × 38 = ₹760. Using the market price as the conversion price, or using face value as the conversion value, confuses the two measures.
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