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13 December, 12:48

Maple Aircraft has issued a convertible bond at 4.75% interest due 2020. The market price of the convertible is 93% of face value (face value is $1,000). The conversion price is $45. Assume that the value of the bond in the absence of a conversion feature is about 63% of face value. How much is the convertible holder paying for the option to buy one share of common stock?

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  1. 13 December, 16:48
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    The convertible holder paying for the option to buy one share of common stock is $13.63

    Explanation:

    According to the given data we have the following:

    Value of convertible bond=93%*1,000=$930

    Value of straight bond=63%*1,000=$630

    Value of warrants=$300

    Hence, number of warrants per bond=$1,000/$45

    number of warrants per bond=22

    Therefore, price of one warrant=$300/22

    price of one warrant=$13.63

    The convertible holder paying for the option to buy one share of common stock is $13.63
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