CFA CURRICULUM VOLUME 5, PAGE 321: Exhibit 24: 1)where did “convertible theoretical value” come from? how was this value calculalated? 2)where did “convertible return %” come from? How was the initial value and subsequent values calculated? thanks
The curriculum does not go into the valuation model for convertibles. So, we don’t have to know that for the exam. " The convertible’s theoretical value is based on some valuation model not discussed here." (Level II Volume 5 Alternative Asset Valuation and Fixed Income , 5th Edition. Pearson Learning Solutions p. 321). Also the LOS states compare and contrast not calculate. compare and contrast the risk-return characteristics of a convertible bond with the risk-return characteristics of ownership of the underlying common stock. (Level II Volume 5 Alternative Asset Valuation and Fixed Income , 5th Edition. Pearson Learning Solutions p. 279). In practice, the valuation is usually done using binomial trees or factor models and there are books/papers on the topic if you’re interested. I think the takeaway from this section is just the difference between returns of the stock and the bond.