has anyone seen any major questions on this in any practice tests? seems like a simple enough concept with a few formulas? and maybe some definitions… any input?
i guess a quick overview helps Conversion ratio = the number of shares you can convert to Conv Price = Issue price/ Conversion ratio Straight value – is the value if the bond were not convertible The minimum value at which a convertible bond trades is its straight value or its conversion value. Whichever is GREATER Key Points 1) The main drawback of investing in a conv bond vs the stock is that when the stock price rises, the bond will underperform because of the conversion premium of the bond 2) If the stock price remains stable, the return on the bond MAY exceed the stock returns due to the cpn payments received on the bond 3) If the stock price falls, the straight value of the bond limits downside risk
I don’t understand Key Point 1. If the stock price rises, the conversion value of the bond increases, so the bond should perform quite well. I’d agree that the YTM will be very low, but if its yield you’re looking for, you could always convert, sell, then reinvest in non-convertible bonds.
"has anyone seen any major questions on this in any practice tests? " No major questions, but there were two questions in a vignette about this in Schweser Test 2AM (might’ve been PM). Doubt they’d dedicate a whole vignette to it, but two or three questions wouldn’t be surprising at all.
nm, I just read the important phrase “vs the stock” Somehow I glanced over that the first time. Makes a pretty important difference.
“If the stock price rises, the conversion value of the bond increases, so the bond should perform quite well.” It does perform quite well, but the point is that owning the stock outright would perform quite well-er than owning the convert.
------------------------------------------------------- > "has anyone seen any major questions on this in > any practice tests? " > Stalla practice 1, if memory is correct.
The only tricky concept is the Premium Payback period…I forget the exact terminology but you calculate: Premium Per Share / (Coupons - Dividends)…the denominator is called “Favorable Income per Share”
CFA_DC_Area Wrote: ------------------------------------------------------- > has anyone seen any major questions on this in any > practice tests? > > seems like a simple enough concept with a few > formulas? and maybe some definitions… > > any input? Level II exam 2009
point is guys trust us retakers nothing is beneath the CFA ability to make a vignette or 2 off of a la BOP…jus pray i lucky that i can do decent on whateva curve ball they throw out there
There is a decent vignette on book II exam 3AM or maybe PM, cant remember but it was decent.
very true… thanks all
I am sure there is a one in Book 7, can’t remember which
this was on last year’s exam, or 07 i forget… but an entire section of converts was there