the value of convertible bonds depends on conversion value. Conversion value is

Question

the value of convertible bonds depends on conversion value. Conversion value is what the bonds would be worth if converted immediately into common stock at current prices. Conversion value is equal to current price of common stock x number of shares of common stock to be received when the bond is converted. The value of a convertible bond typically exceeds both the straight bond value and the conversion value. How would this differ when the value of the firm is low vs. when the value of the firm is high?

Explanation / Answer

For low asset values convertible debt is primarily
characterized by its investment value because it behaves like straight debt, whereas for high
asset values convertible debt rather behaves like a proportion of equity

If the value of the firm is high, then the bond will trade well above the straight bond value, almost as if it were just stock -- it will fluctuate with the stock price. The straight bond value will be well below the market value.

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