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Suppose a firm just issued a $1,000 par value convertible bond. Its conversion ratio is 30 and the stock currently sells for $25 per share. Would it make better financial sense to hold onto the bond or convert it?

Respuesta :

Answer:

The bond should be held and conversion is not recommended

Explanation:

Conversion ratio specifies the no of shares which would be issued in exchange of one bond.

Market price of a share = $25 per share.

Hence convertible value of 1 bond = 30 shares/ stocks × $25 = $750

Face value of a bond = $1000

Thus, it is advisable to hold the bond and not convert it since the bond's conversion value is less than it's face value. So investor in such a scenario stands to lose if he opts for conversion.

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