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Jorge bought APJ Inc.’s convertible bond at par ($1,000) with a yield of 3.25%. This bond had a conversion ratio of 25:1 at the price of $40 per share. If APJ Inc.’s shares are currently trading at $48 per share, should Jorge convert his bond into shares?

Answer :

The total amount you receive is lower than the bond par value, so today you shouldn't convert.

Following are the calculation to the given question:

  • At a price of $40 per share, the bond had a 25:1 conversion ratio
  • Total Conversion Value = $40 × 25 = $1,000
  • The value of the Conversion is $1,000 which is the Par bond value.
  • Present bond price = $35.

If today you're converting,

  • Total receiving amount = $35 ×25 = $875

So, the total amount you receive is lower than the bond par value, so today you shouldn't convert.

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