Series 7 Exam Question 22: Answer and Explanation

Question: 22

A bond is convertible into common stock for $40. What is the conversion ratio?

• A. 20
• B. 25
• C. 30
• D. 40

Correct Answer: B

Explanation:

B. The conversion ratio is the amount of shares that the bond is convertible into. Remember, you can assume that the par value of a bond is $1,000 unless told differently. To determine the conversion ratio, use the following formula:

$\text{conversion ratio}=\frac{\text{par value}}{\text{conversion price}}=\frac{\$1,000}{\$40}=\text{25 shares}$