conversion premium

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jahid_107

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i am getting much confused while solving a question.
“Mr. Alez was analyzing a convertible bond priced at $1055 and that has a conversion ratio of 7 share per convertible bond. Currentlystock is traded at $135. The bond pays cupon $50 and the stock is expexted to pay $3.5 per share annually”
question :
what was the market convrsion premium per share for the convertible bond ?
  1. $35
  2. $30
  3. $25
My solution :
Market conversion price = (1055/7) = $150.71
Market conversion premium per share = $150.71-$135 = $15.71
But this number is not in the option.
Thanks in advance
NB; This question is taken from a local third party provider
 
The author of the question blew it.
Do they provide the “correct” answer and an explanation?
 
The correct answer is given here as “B” without any explanation.
 
jahid_107 wrote:
Market conversion price = (1055/7) = $150.71
Market conversion premium per share = $150.71-$135 = $15.71
Click to expand...
Just a quick thing, since i got confused myself on this one: the conversion price =/= the convertible bond price
Convertible bond price = Market price of convertible bond / Ratio
Conversion price = Par value / Ratio
The conversion price is the one used as a benchmark in order to measure the risk-return profile (busted convertible, hybrid or equity equivalent) of a convertible bond. If the price of stock is below the conversion price, the convertible bond price = conversion price.
 
OMG! i almost got a heart attack when I did not see 15.71 :)
 
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