Question #25

Reading: Reading 27 Valuation and Analysis of Bonds With Embedded Options - Anwers

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Part of Context Group: Q24-25
Shared Context
- What is the value of the call option embedded in this bond? A) $6.675. B) $0.461. C) $12.924. Explanation Given in the problem is the value of the bond's option-free counterpart: $102.196. From Part A we've determined the price of the callable bond to be $101.735. From the relationship: Vcall = Voption-free – Vcallable  We can determine that the value of the call option is $102.196 – $101.735 = $0.461. (Module 27.2, LOS 27.f)
Question
The market conversion premium ratio for Stellar's convertible bond is closest to:
Answer Choices:
A. 20.6%
B. 28%
C. 2.40% Explanation An investor who purchases the convertible bond rather than the underlying stock will pay a premium over the current market price of the stock. This market conversion premium per share is equal to the difference between the market conversion price and the current market price of the stock. Market conversion price = market price of CB ÷ conversion ratio = 1024 / 25 = 40.96 Market conversion premium = conversion price − market price = 40.96 − 32 = 8.96 (Module 27.2, LOS 27.f)
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