A Firm Issues the Convertible Debt Shown Above

question 25

Multiple Choice

$$\begin{array} { l l } \text { Couporc } & 0 \% \\\text { Conversion Ratio } & 20 \% \text { shanes per } \$ 1000 \text { principol amount } \\\text { Call Dates } & \text { 1 July } 2012 \\\text { Call Prick: } & \text { Par } \\\text { MSaturity: } & \text { 1 July } 2019\end{array}$$ A firm issues the convertible debt shown above. The share price of this company on 1 July 2012 is $4.95. If the bonds are called on this date, which of the following is the action most likely to be taken by a holder of a bond of face value $10,000?

• A) Accept the call price and receive $10,000.
• B) Convert the bond and accept shares with a value of $10,000.
• C) Convert the bond and accept shares with a value of $10,128.00.
• D) Convert the bond and accept shares with a value of $10,246.50.

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Definitions:

Effective Yield

Effective yield is the total yield on an investment, taking into account the effects of compounding interest or reinvestment over a given period.

Maturity Date

The date on which a financial obligation must be repaid in full.

Present Discounted Value

The present worth of a future amount of money or series of cash inflows, discounted at a given rate of return.

Interest Rate

The cost of borrowing money or the payment made for the use of money, typically expressed as a percentage of the principal amount annually.