Convertible Bond Conversion Ratio and Stock Parity Calculation
A convertible corporate bond has a Par value of $1,000 and a conversion price of $25 per share. If the bond is currently trading in the market at $1,200, what is the Conversion Ratio, and what is the Parity Price of the common stock?
Conversion Ratio = Par Value ($1,000) ÷ Conversion Price ($25) = 40 shares (fixed for life of bond). Parity Price of Stock = Bond Market Price ($1,200) ÷ Conversion Ratio (40) = $30.00 per share.
Complete Analysis & Legal Rationale
If the common stock trades above $30, arbitrageurs buy bonds and convert to stock. If below $30, converting makes no economic sense.
Mathematical Step-by-Step Derivation
- Step 1: Conversion Ratio = $1,000 Par ÷ $25 Conversion Price = 40 shares.
- Step 2: Parity Stock Price = Bond Market Price ($1,200) ÷ Conversion Ratio (40) = $30.00.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
CR = 40 shares ($1,000 / $25); Parity = $1,200 / 40 = $30.00.
Uses bond market price ($1,200 / 25 = 48) to calculate ratio, which violates the $1,000 par rule.
Leaves parity price equal to initial conversion price.
Wrong ratio arithmetic.
Official Standard: Formulas for conversion ratio and parity calculations.