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:

Vicarious Conditioning

The development of the conditioned response to a stimulus after observation of the pairing of conditioned stimulus (CS) and unconditioned stimulus (UCS).

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A conditioning process where a stimulus that has been conditioned to elicit a response is used as an unconditioned stimulus to condition a new stimulus.

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