FINRA Series 7Investment Information and Suitable RecommendationsMedium
A convertible bond has a par value of $1,000 and a conversion ratio of 25. The bond is currently trading at $1,050. What is the parity price of the underlying common stock?
- A$40.00
- B$52.50
- C$50.00
- D$42.00
Show answer & explanationAnswer & explanation
Correct answer: D. $42.00
Parity price of the stock = bond market price ÷ conversion ratio = $1,050 ÷ 25 = $42.00. This is the price at which the stock would need to trade for the converted shares to equal the current bond value.
Why the other options are wrong
- A. Incorrect — this is par value ($1,000) divided by ratio, not the current market price.
- B. Incorrect — miscalculation; not derived from the correct division.
- C. Incorrect — this is the conversion price ($1,000/25), not parity based on market price.
Convertible Bond Parity Price
Parity price is the theoretical stock price at which the bond's value equals the value of the shares it converts into, calculated as bond price ÷ conversion ratio.
- Conversion ratio = par value ÷ conversion price
- Parity price = current bond price ÷ conversion ratio
- Used to assess if converting is advantageous
- Differs from conversion price, which uses par value
Memory trick: Parity: 'price of bond, split by the ratio.'