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Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $49. The bonds are available

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Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $49. The bonds are available for immediate conversion. The current price of the company's common stock is $43 per share. The current market price of the convertible bonds is $990. The convertible bonds' straight value is not known.

a. What is the minimum price for the convertible bonds?

b. Explain the difference between the current market price of each convertible bond and the value of the common stock into which it can be immediately converted.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Corporate Finance

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ISBN: 978-0077861759

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Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan

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Callable bond: A bond that can be redeemed by the issuer before the maturity date, potentially leaving the bondholder without future interest payments. They usually offer higher yields than non-callable bonds. Puttable bond: A bond that gives the bondholder the right to sell the bond back to the issuer before the maturity date, providing flexibility to the bondholder. They typically offer lower yields than non-puttable bonds. Convertible bond: A bond that can be converted into a predetermined number of shares of the issuing company\'s common stock at the bondholder\'s discretion. They offer the potential for capital appreciation in addition to periodic interest payments and typically offer lower yields than non-convertible bonds. Zero coupon bond: A bond that does not pay periodic interest payments, but instead is sold at a deep discount to its face value and redeemed at face value upon maturity, providing a capital gain to the investor. They are often used to fund long-term projects and have longer maturities than other bonds.

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