What Is the Minimum Value of the Call Option on a Convertible

question 124

Multiple Choice

What is the minimum value of the call option on a convertible bond with a conversion ratio of 30 if the bond offers a 9% coupon, has 10 years until maturity and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

• A)$0
• B)$5
• C)$50
• D)$65 Bond value = $1,000 because coupon rate = market rate.
• Conversion value = $30 x $35 = $1,050.
• Therefore, bond will sell for conversion value since it exceeds bond value.
• Value of call = selling price of bond - bond value
• = $1,050 - $1,000

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Definitions:

Critical Path

The longest sequence of dependent tasks in a project, determining the shortest possible duration to complete the project.

Variance

A statistical measurement of the dispersion or spread in a set of data points, reflecting how much the numbers differ from each other and from the mean.

Probability

The measure of the likelihood that an event will occur, quantified as a number between 0 and 1, with 1 indicating certainty.