Is this correct: conversion price = par v of cb/conv ratio market conv price = mv of cb/conv ratio conversion value = mv of stock * conv ratio thx
don’t forget favourable income differential…
I have a feeling they will hit us with a convertible question
I have heard that convertible bond have been on the test for the last 6 out of 7 years.
I hope its on there. Those are easy points.
there was one last year - people argued about the answer all the way until august
do you have any good ways of remembering the formula’s? There are not that many examples to work through…
say you have a convert bond at par of 1000, trading at 1090 pays a 5% div can be converted into 25 shares co stock which trades at 30 and pays a .1 div mkt premium is 1090/25 - 30 = 43.60 or a premium of 13.60 premium pay back is that 13.60 premium divided the favorable income diff per share; this is the bond interest-stock divs/conversion ratio or coupon int-divs/conversion ratio so (1000*.05)-25*.1/25 = 1.9 13.6/1.9 = 7.16 if you can understand that, then you can do the question from last year
think of from cost benefit perspective…holding a cb vs a stock. From cb you get coupon, but from stock you get div…the preferential period is to see how long can you recover the benefit (if there is some) from receiving coupon instead of receiving div…