What is the current conversion premium for a convertible bond where $100 in market value of the bond is convertible into two shares and the current share price is $50?

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

What is the current conversion premium for a convertible bond where $100 in market value of the bond is convertible into two shares and the current share price is $50?
A . 0.5
B . 1
C . 0
D . None of the above

View Answer

Answer: C

Explanation:

Since $100 is convertible into two shares, the price upon conversion per share is $50,

which is the same as the current share price. Therefore there is no premium, and Choice ‘c’ is the correct answer.