Suppose that a convertible bond has a conversion ratio of 20 and a delta of 0.70 . For a price change of $0.125 for the stock price per share, what is the approximate change in the convertible bond's value?
What will be an ideal response?
The delta is used to estimate the impact of a change in the price per share of the underlying
stock on the convertible bond's value as follows:
approximate change in a convertible bond's value =
change in stock price per share * conversion ratio * delta
For our problem, we have a conversion ratio is 20, a delta of 0.70, and a price change of $0.125 for the stock price per share. Inserting in these values, the approximate change in the convertible bond's value is:
$0.125 * 20 * 0.70 = $1.75
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