Hi all, How is everybody coping with this. Not tricky but so many terms to remember? Any one got thoughts on this. Thank
Stalla explains it well. It took me a few passes and a few items sets, but I think I have it.
I found a short cut for market conversion premium ratio as Market price of bond/Conversion ratio, instead of the more complex one in the book, agreed?
its easiest way i have found is to start off with the conversion price and then work it from there. if the bond market value is $950 and the conversion ratio is 10, you know your conversion price is $95. The actual stock price will likely be lower (say $90). well 95-90/#shares is the premium per share. then the trickiest part is remembering to take the coupons pmts-stock divd/#shares and use this number to divide by the premium per share. this is favorable income diff. so that time payback period is going to be the premium per share/fav income differential
yeah, too many of them to remember, but good part is that each one builds on top of each other. just know the definition – i think they are self explanatiory price = current price of convertible conversation ratio = how many share u can get for that convertible market price of your convertible shares (also called convertion value) = stock price * conversion ratio market price of your convertible shares (99% of the time) < current price of the convertible, (ask yourself why this must be true, cuz if it wasn’t true, there would be arbitrage, buy low sell high for free). because market price of your convertible shares < current price of bond, you have a premium that you must pay. That premium can be calcuated as per share basis in , or as a %. To calculate in == (current price of bond - market price of stocks) / (convertion ratio) To convert that premium in %, = $ / market price of stock. Usually stocks will pay dividends and bonds will pay coupons. Coupons will be greater than dividends (ask yourself why this must be true, or if tis not true what kind of captial structure the company must have, and if it does have that will it exists) In any case, the excess of coupons over dividends, gives you extra income. Figure out how how much that extra income is worth per share - its called favorable income per share = coupon - (dividend*convertion ratio) / convertion ratio Now premium payback period is easy to know. you know how much extra money you ar emaking by holding the bond, and not the stock. And you also know how much premium you paid per share, had you simply invested your bond money into shares. so its market premium per share / favorable income pers hare ok. that was good for a review for myself.