Question 01 A company issues 5% convertible bonds at their nominal value of $ 6 million.
The bonds are convertible at any time up to maturity into 500 ordinary shares. Alternatively the
bonds will be redeemed at par after 3 years.
Similar nonconvertible bonds would carry an interest rate of 7%.
The present value of $1 payable at the end of year, based on rates of 5% and 7% are as follows:
End of year
5%
7%
1
0.935
0.952
0.907
2.
0.873
3
0.864
0.816
Requirement:
1. What amounts will be shown as a financial liability and as equity when the convertible bonds ar
issued?
2. What amounts will be shown in the income statement and Statement of Financial Position for
years 1-3?

If the conversion ratio is 40, or 40 to 1, then each bond with a par value of $1,000 can be converted into 40 shares of the issuing company. The conversion feature in the trust indenture may also be expressed as a conversion price, which is equal to the face value of the bond divided by the conversion ratio.

Explanation:

A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond's life and is usually at the discretion of the bondholder.

As a hybrid security, the price of a convertible bond is especially sensitive to changes in interest rates, the price of the underlying stock, and the issuer's credit rating.

i would have to say its c

answer; according to the ( irs );