Question

1.You observe that the value of Jubilee Corp. common stock has risen from $25 per share to $40 in the last six months. If Jubilee’s bonds have warrants that allow bondholders to buy 5 shares of Jubilee stock for $50.00 per share, the market value of those bonds is likely to be

(a)subject to a large inflation premium

(b)equal to the coupon rate

(c)rising

(d)$250

Answer 1

One must remember that the price of a convertible bond closely follows the price of the underlying stock. Moreover, when the stock is performing poorly companies don’t allow conversion. So, if a company is offering conversion then it means that the stock is performing well.

In the present case, if Jubilee’s bonds have warrants that allow bondholders to buy 5 shares of Jubilee stock for $50.00 per share, the market value of those bonds is likely to be rising.