What Is the Minimum Value of the Call Option on a Convertible

What is the minimum value of the call option on a convertible bond with a conversion ratio of 30 if the bond offers a 9% coupon, has 10 years until maturity and market interest rates are 9% for comparable bonds? The stock is currently priced at 35.

A) $0
B) $5
C) $50
D) $65 Bond value = $1,000 because coupon rate = market rate.
Conversion value = $30 x $35 = $1,050.
Therefore, bond will sell for conversion value since it exceeds bond value.
Value of call = selling price of bond - bond value
= $1,050 - $1,000

Correct Answer:

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