Convertible bond quiz

Assuming the stock underwent a one for two reverse split, how would the features of the company bonds be adjusted? a) number of shares associated with the put option would be cut in half b) conversion ratio of the convertible bond would be reduced by 50% c) market conversion price of the convertible bond would be doubled d) conversion value of the convertible bond would be reduced by one half ans is b, but c also seems correct to me.!?!


C bond 1000 face conver ratio 10 = 100 shrs. * $5 = 500 1 for 2 split bumps conver rartio to 20 and 50 shrs. * $10 = 500 reverse splits increase share price so again, C



C wouldn’t be fair, just because a split all of a sudden you could sell the bond for twice what it was originally worth.

if you change price but don’t change the number then bondholders can convert more % of the total shares than was initially planned

market conversion price = bond value / conversion ratio so if your conversion ratio is halved, then shouldn’t the market conversion price double?

cnvertion ratio has to change. Bond value remains unchanged but the convertion to stock must/should fall in line to the equity split.

yes the point is that if you just double it but keep the same number means that you are allowed to convert a hihger % of equity than it was intended reducing the number has that effect but if you just double the price is not enough


wats the an

maybe i am too tired… but the spilt does not effect the price of the bond. So if bond price stays constant, the convert ratio must follow the spilt. The dollar value of the converted equity will remain the same, less coverted shrs and a higher stk price.

ans is B florinpop (or anyone else), can you then explain a bit what’s wrong with my formula market conversion price = bond value / conversion ratio My understanding is that for each bond, after the split, you can convert to less shares. Thus to balance out the effect, the market conversion price doubled? what’s wrong with my logic?

Where is the brain trust ??

If you reduce the conversion ratio the market price will double. Originally $950 value convertible to 100 shares, market price $8 Market Conversion Price = $9.50 Reverse split occurs Market price is now $16 Bond is still $950 but the conversion ratio is now 50 Market Conversion Price = $19 Price doubled, but because the ratio was cut in half.

mercy thanks

Niblita, I get what you said. But doesn’t that mean C is also correct?

The feature of a bond would be the conversion ratio, the market conversion price is just after the fact I guess is a way of saying.