Answer-first summary for fast verification
Answer: Bond A
## Explanation To determine which bond would increase the most with a share price increase, we need to analyze the **conversion values** and **current bond values**. **Current Conversion Values:** - **Bond A**: Conversion ratio = 18, Share price = $70 - Conversion value = 18 × $70 = **$1,260** - **Bond B**: Conversion ratio = 10, Share price = $70 - Conversion value = 10 × $70 = **$700** - **Bond C**: Not convertible, so no conversion value **Analysis:** - **Bond A**: Current value = $1,200, Conversion value = $1,260 - The bond is trading **below** its conversion value ($1,200 < $1,260) - This means it's already **in-the-money** and behaves like equity - Any share price increase will directly increase the conversion value - **Bond B**: Current value = $1,000, Conversion value = $700 - The bond is trading **above** its conversion value ($1,000 > $700) - This means it's **out-of-the-money** and behaves more like a straight bond - Share price increases will have less impact until the conversion value approaches the bond price - **Bond C**: Not convertible, so share price changes have minimal direct impact **Conclusion:** Bond A is already in-the-money (trading below conversion value), so it will be most sensitive to share price increases. As the share price rises, Bond A's conversion value will increase directly, making it likely to appreciate the most.
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$1,000 par value, 10-year maturity bonds issued by the same company whose stock currently has a price of $70:| Bond A | Bond B | Bond C |
|---|---|---|
| Convertible: Yes | Yes | No |
| Conversion ratio: 18 | 10 | N/A |
| Callable: No | No | At par |
Current bond value: $1,200 | $1,000 | $1,000 |
If the share price increases, which bond is likely to increase in value the most?
A
Bond A
B
Bond B
C
Bond C
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