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.