Convertible Bonds & Parity — Q&A
Questions
Q1. ⚠️ What is the biggest difference between convertible preferred stock and convertible corporate bonds?
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Par value — preferred stock typically has $100 par; convertible bonds typically have $1,000 par. Conversion concepts and formulas are otherwise essentially the same.
Q2. A $1,000 par convertible bond has a conversion price of $40. What is the conversion ratio?
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25:1. CR = Par ÷ conversion price = $1,000 ÷ $40 = 25 shares per bond.
Q3. A convertible bond has a conversion ratio of 20:1. What is the conversion price?
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$50. CP = Par ÷ conversion ratio = $1,000 ÷ 20 = $50 per share.
Q4. An investor buys a convertible bond (CR 20:1) at 90 (percentage of par). What is the conversion cost per share, and at what stock price does conversion become profitable?
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$45 per share ($900 ÷ 20). Conversion creates profit when the common stock trades above $45.
Q5. Same bond (CR 20:1, bought at 90 = $900). Common stock rises to $60. What is the profit if converted and shares sold?
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$300. Conversion value = 20 × $60 = $1,200; profit = $1,200 − $900.
Q6. A 10% $1,000 par convertible bond has conversion price $20 and is purchased at 110. What is the stock parity price (PPoCS)?
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$22. CR = $1,000 ÷ $20 = 50:1. Stock PP = bond market price ÷ CR = $1,100 ÷ 50 = $22. ⚠️ Coupon (10%) and stock market price ($25) are not needed for the parity calculation.
Q7. A 7% $1,000 par convertible bond has conversion price $10; common stock trades at $8. What is the bond parity price (BPP)?
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$800. CR = 100:1. BPP = stock price × CR = $8 × 100 = $800. With the bond at $950, there is no arbitrage opportunity.
Q8. ⚠️ How do stock parity price and bond parity price formulas differ?
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Stock PP divides bond market price by the conversion ratio. Bond PP multiplies stock price by the conversion ratio. Confusing the operations is a common exam trap.
Q9. A callable convertible bond is callable at 101. What dollar amount does the issuer pay per $1,000 par bond if called?
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$1,010 (101% of par). Investors compare the call price to conversion value to decide whether to tender or convert.
Q10. A $1,000 par, 5% convertible bond has conversion price $50; stock is at $40. After a 4:1 stock split, what are the adjusted conversion ratio and conversion price under an anti-dilution covenant?
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CR goes UP to 80:1 (20 × 4); CP goes DOWN to $12.50 ($50 ÷ 4). Conversion value stays $800 (80 × $10 post-split price). On splits: ratio × split factor, price ÷ split factor.
Sources
| # | Source | Publisher |
|---|---|---|
| 1 | Achievable Series 65 — chapter 1.2.5 | Achievable (course text) |