Question 7
ICAN
•
2026
•
FINANCIAL MANAGEMENT
•
mixed
Case Stimulus
A Nigerian company ABC has issued convertible bonds with face value of ₦1,000, coupon rate of 4%, paid annually and maturity of 5 years. The conversion ratio is fixed at 10:1.
Requirements
(
a
)
If during the tenure, up to maturity of the bond, the stock (shares) of company ABC undergoes a stock split of 2:1; would this affect the conversion ratio of the convertible bonds issued? If yes, what would be the new conversion ratio? If no, explain why.
(
b
)
After the stock split, what will be the conversion price of the convertible bond issued?
(
c
)
Where the stock of ABC (after the split) is currently trading at ₦52 in the spot market. What will be the conversion value of the convertible bond?
(
d
)
Define the straight value of a convertible bond. Given that another bond trading in the market similar in all characteristics to that of the convertible bond exists yielding 5%, what will be the straight value of the convertible bond?
(
e
)
Define conversion premium of a convertible bond. For the given convertible bond, what is the conversion premium if it is trading at 110 in the market?
(
f
)
What is the minimum value of a convertible bond? What is the minimum value of the given bond?
(
g
)
Why do convertible bonds usually have a lower rating as compared to non-convertible bonds with similar characteristics?
(
h
)
Now consider that a rating agency has lowered the rating of the convertible bond after one year of issue. What impact will this lowering of rating have on the price of the bond? Explain.
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About This Question
This is
Ican
2026
Financial Management
Question 7.
It is one of the
mixed
questions from the
2026
Ican
Financial Management
examination.