The Surplus Value Company had $10 million (face value) of convertible bonds outstanding in 2010. Each bond has the following features.

Face value $1000 Conversion price $25 Current call price 105 (percent of face value)

Current trading price 130 (percent of face value)

Maturity 2017 Current stock price $30 (per share)

Interest rate 10% (coupon as percent of face value)

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a. What is the bond’s conversion value?

b. Can you explain why the bond is selling above conversion value?

c. Should Surplus call? What will happen if it does so?

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