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A corporate bond is convertible at 40 and the corporation has called it for redemption at 106. The bond is currently selling at 115 and the stock's current market price is 45. Which of the following would a bondholder most likely do?
a. Sell the bond (ANS)
b. Convert the bond into common stock
c. Allow the corporation to call the bond at 106
d. None of the above
Value of a. Other than receiving 115 per bond sold, I a not sure this is a gain
Value of b. Are you converting 115 for $45? What is the value of this?
Value of c. You lose 49
I guess I don't understand the mechanics of this situation. For one, I don't see how to value the profit in the sale of the bond. And for the conversion, don't you need to know if it is a 1:1 conversion or something of the kind?
a. Sell the bond (ANS)
b. Convert the bond into common stock
c. Allow the corporation to call the bond at 106
d. None of the above
Value of a. Other than receiving 115 per bond sold, I a not sure this is a gain
Value of b. Are you converting 115 for $45? What is the value of this?
Value of c. You lose 49
I guess I don't understand the mechanics of this situation. For one, I don't see how to value the profit in the sale of the bond. And for the conversion, don't you need to know if it is a 1:1 conversion or something of the kind?
