Answer:
Conversion value = $980
Explanation:
A convertible bond is that which gives the holder the option of converting the bonds to pre-determined number of ordinary shares at a particular time in future.
When faced with these options , a rational investor who maximizes return would opt for the option with the higher value.
Hence, we would compare the conversion value and the bond price
The conversion value would be the higher of the value of shares on conversion and the current price of the bond,
The conversion value can be worked as follows:
C= Price of share × Number of shares
C= $28× 35 = $980
Price of Bond =$975
A rational investor would convert.
Conversion value = $980
