Problem:
An analyst has recently informed you that at the issuance of a company's convertible bonds, one of the two following sets of relationships existed:
Scenario A: Face value of bond $1,000; Straight Value of Convertible Bond: $900; Market Value of Convertible Bond: $1,000
Scenario B: Face Value of Bond: $1,000; Straight Value of Convertible Bond: $950; Market Value of Convertible Bond: $900
Assume the bonds are available for immediate conversion. Which of the two scenarios do you believe is more likely? Why