Can someone explain this? Busted for who? Issuer or buyer?
In the Busan topic test conversion price of the bond is 5025 and the closing share price is 2985 resulting in a conversion premium of 5025/2985-1=68%. Thus, the embedded option is far out of the money and the convertible is busted.
I just can’t put these statements together logically.
I am going to assume for the buyer. The option that far out of the money it has to trade like a straight bond.
Isn’t conversion price=bond price/conversion ratio, so a high conversion price means the bond has increased in value a lot since conversion ratio is a constant…?
its not usually based on the bond pricing its based on the stock price. Say you have a conversion price of around 30, the stock may be around 25 when issued. A few years in the stock has dropped to 5 and you basically have no chance of it rebounding. At that point the convertible is said to be “busted” as you arent going to realistically have a chance to make a profit off converting and it will just trade like a straight bond.
“Busted” for the owner of the bond. Conversion right is useless because the stock dropped too much (call option is FAR out of the money).