18. Convertible bonds (S25.2) The Surplus Value Company had $10 million (face value) of convertible bonds outstanding

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18. Convertible bonds (S25.2) The Surplus Value Company had $10 million (face value) of convertible bonds outstanding in 2020. Each bond has the following features.

Face value $1,000 Conversion price $25 Current call price 105 (percent of face value)

Current trading price 130 (percent of face value)

Maturity 2027 Current stock price $30 (per share)

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

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?

Chapter 25 The Many Different Kinds of Debt 737

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