Question

B & O Railroad's convertible debentures were issued at their $1,000 par value in 2008. At
any time prior to maturity on February 1, 2028, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc ?

a. $25
b. $40
c. $1,025
d. $1,000
e. $50

Answer 1

A convertible note (or debenture or wtv) is usued at par and you know from the beginning you get 25 shares for each note. So, $1,000=25 shares --> divide each side by 25 and you get your conversion ratio, $1000/25=conversion ratio of 40.

The conversion price is the ratio of the par value of your note to your conversion ratio, so $1,000/40=$25.

http://www.maileyrogers.com/documents/Intro_to_Convertible_Debentures.pdf