This workout regarding convertible debt asks us to calculate the stock price above which the bond will be converted into shares, the market conversion price, which is the effective price of buying shares through the convertible bond, and the value of the call option embedded in the convertible bond on a per share basis. The workout provides the convertible bond price of $1,080 and its par value of $1,000 and also gives the price of an equivalent non-convertible bond of $980. The conversion ratio is 50, so we get 50 shares per $1,000 of par value should we choose to convert. And the current stock price for the underlying shares is $19.50. So the price above which the bond will be converted, so at the end of the life of the convertible bond, you've got a choice to either take the $1,000 of par value or to take 50 shares. So if we divide the redemption proceeds of 1000 by the conversion ratio, this gives us $20. If the stock price is above $20, it makes sense to take the 50 shares that are worth more than a thousand dollars. However, if the stock price is below $20, the 50 shares that you could convert the bond into would be worth less than $1000, so it doesn't make any sense to convert into shares. You should just take the redemption cash flow on the bond of $1,000. The market conversion price is the effective cost of buying a share through the convertible bond. Well, the cost of buying the convertible bond is $1,080, and this enables you to effectively purchase 50 shares. So therefore, the market conversion price, $21.60. If an investor is buying the convertible bond to access the shares, then the investor is effectively paying $21.60 per share.

The value of the embedded option within the convertible bond can be identified by looking at the difference in price between the convertible bond and the equivalent non-convertible bond.

It's possible to see from this that the price is $100 higher, but that one bond can be converted into 50 shares. So the premium for the convertible bond, which includes the call option, effectively, within that price, is $100 spread over 50 shares or, in other words, is $2 per share.