Anyone figured out a way to remember all these formulas associated with convertible bonds… so many.
No, and if I took the exam today and there was a full vignette on convertibles I’d be skrood. It’s one area I have to commit some time to, which for me, means working the main blue box examples and writing and re-writing the formulas over and over again. I’m fairly solid on the testable concepts though.
I also dreaded these item sets but then realized I can just remember the first one
Conversion price =par value/conversion ratio
and the rest are some kind of derivatives of this one with a bit of concentration and critical thinking.
If you are given the par value of the convertible bond say 1000 and conversion ratio to be 25 converion price can be found 1000/25=40 or if you are given the conversion price say 25 ratio can be found the same way.If i as a investor hold a convertible bond of value 1000 i can convert it into 25 shares at a price of 40.
Minimum price of a convertible bond is= max of straight bond,conversion value. conversion value=conversion ratio from above into market price of the stock at that particular date(could be anything say 45 so 45*40 =1800). value of a straight bond is found using normal method through calculator(pv fv pmt).
Market conversion premium-you will be given the price of convertible bond on some date say 1200 we already know the conversion ratio so 1200/25=48 compare this with the actual share price and find out the difference ie the premium.
Value of convertible bond= Value of option free bond+ call option on stock of the company.
This is what i understand.I am not getting into depth of it as i also get confused.
Good tips.
This is one of the sections where if there was 6 questions on it and I didnt study, I would cry. It would be somewhat easy to plug and chug, just takes some time to remember the formulas.
Wright all those formulas on sheet of paper a couple of times, try to understand the link between formulas (convertible bond value) and you 'll be fine.