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You own a bond that has a face value of $1,000 and a conversion ratio of 26. You have just received notification that the bond is being called at a premium of $40. The stock price is $41.20 a share. You should _____ your bond because the conversion value is _____.

A. convert; less than the call price by $40.00

B. convert; greater than the call price by $31.20

C. convert; greater than the call price by $4.75

D. not convert; less than the call price by $31.20

E. not convert; greater than the call price by $40.00

Respuesta :

Answer:

B. convert; greater than the call price by $31.20

Explanation:

The computation is shown below:

Conversion value is

= Conversion ratio × stock price

= 26 × $41.20

= $1,071.20

And, the call price is

= Face value of the bond + premium

= $1,000 + $40

= $1,040

The difference is

= $1,071.20 - $1,040

= $31.20

Therefore we should convert as the conversion value is more than the call price

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