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If a $1000 per share value of convertible bond is issued for $1000, and is convertible into 20 shares of issuer's common stock that pays no dividend, there will be no economic benefit in converting the debt to stock as long as the common stock is selling for less than $50 per share. If the bond value is indeed in the equity-equivalent region, as the value of a single share of common stock increases $1, the bond value will increase:
Suggested Answer: D
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32 comments · newest first
RA
Rasheeda
12 months ago
Nope, it should be $25, not $20.
ME
Melodie
12 months ago
So if stock goes up $1, bond value goes up $20, right?
ST
Stephanie
1 year ago
Wait, are you sure about that? Sounds off.
LO
Lorean
1 year ago
Totally agree, makes sense!
ST
Stevie
1 year ago
The bond converts to 20 shares at $50 each.
AN
Annamaria
1 year ago
I feel like it might be $50, but I’m not entirely confident. I need to double-check my notes on convertible bonds.
JO
Joaquin
1 year ago
If the bond converts into 20 shares, wouldn't that mean the bond value goes up by $20 for every $1 increase in stock price?
MA
Maryrose
1 year ago
I think I practiced a similar question where the bond value increased with the stock price, but I can't recall the exact multiplier.
SH
Shawna
1 year ago
I remember something about how convertible bonds work, but I'm not sure how to calculate the exact change in value.
IR
Ira
1 year ago
Alright, time to put my problem-solving skills to the test. I'll start by considering the basic requirements for Orders, then evaluate each option carefully. Gotta nail this one.
SH
Shoshana
1 year ago
Hmm, I'm a little unsure about this one. I know Approval Process and Workflow Rule are options, but I'm not sure how they would work for automatically creating a new opportunity. I'll need to think this through carefully.
SA
Sarina
2 years ago
Wait, if the stock pays no dividend, does that mean I can't use it to buy myself a nice lunch? This question is really making me hungry...
LA
Lawana
1 year ago
Well, looks like we'll have to stick to using cash for lunch instead.
MA
Madelyn
1 year ago
That's a bummer, I was hoping to treat myself to a nice meal.
AS
Ashley
1 year ago
No, you can't use the stock to buy lunch since it pays no dividend.
MI
Mireya
2 years ago
I'm not an expert, but I think the answer is B. After all, if I had a convertible bond, I'd want to make the most money possible, right? $50 per share increase sounds like a sweet deal to me!
CI
Ciara
1 year ago
User 4: I would go for option B as well. It seems like the most profitable choice.
SH
Shaun
1 year ago
User 3: I'm not sure, but I think it makes sense to go for the $50 increase.
JA
Jacquline
1 year ago
User 2: Yeah, I agree. It would definitely be beneficial to convert the bond at that point.
RE
Reuben
1 year ago
User 1: I think the answer is B too. $50 per share increase does sound like a good deal.
MA
Marshall
1 year ago
User 4: I think B makes more sense, $50 increase is a good deal.
CA
Carissa
1 year ago
User 3: I'm not sure, but I think it might be A) $25.
WI
Wilson
1 year ago
User 2: I agree, that does sound like a sweet deal.
RE
Regenia
1 year ago
User 1: I think the answer is B. $50 per share increase sounds good to me.
MI
Micheal
2 years ago
I'm confused. Isn't the point of a convertible bond to take advantage of the stock price increase? This question is making my head spin!
MO
Mona
2 years ago
Hmm, interesting. I'm leaning towards C, as the bond value should only increase by $20 (1 share x $1 increase) if the stock price goes up by $1.
JU
Juliann
1 year ago
That makes sense, so the answer would be C) $20.
JU
Juliann
1 year ago
I think you're right, it should increase by $20 if the stock price goes up by $1.
AD
Adell
2 years ago
I think the answer is B. If the bond is convertible into 20 shares, and each share is worth less than $50, then the bond value won't increase by more than $50 as the share price increases by $1.
JA
Jacki
2 years ago
I'm not sure, but I think the answer might be B) $50. Can someone explain the rationale behind the correct answer?
CH
Chery
2 years ago
I agree with Dottie, because for every $1 increase in stock value, the bond value will increase by $25.
DO
Dottie
2 years ago
I think the answer is A) $25.