Your company needs funds for expansion and decides to issue a 5-year convertible bond. The stock price currently is $40 and your banker recommends a 25% conversion premium over the current stock price. Using option models the total option value of the convertible is found to be $89.83 per $1,000 face amount of bond. The companys current cost of regular 5-year debt is 4%, assuming semi-annual interest payments. The stock does not pay a dividend.

1. How many shares will each $1,000 bond convert?
   1. 25
   2. 40
   3. 20
   4. 100
2. What is the exercise or conversion price of each option of stock embedded in the convertible?
   1. $25
   2. $40
   3. $48
   4. $50