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

question 47

Multiple Choice

What is the minimum value of the call option on a convertible bond (with face value of $1,000) 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

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Definitions:

Purchase Price

The amount of money paid to buy something, including assets like real estate, securities, or goods.

Suggested Retail Price

The price a manufacturer recommends retailers to sell their product for to consumers.

Discount

A reduction in the price of a product or service, often to attract customers or to sell off excess stock.

Liter

A metric unit of volume equal to one cubic decimeter, used to measure the capacity of liquids and gases.