Floor Value Convertible Bond

Conversion premium current bond price max cv bv where cv stands for conversion value and bv stands for bond value without the conversion feature i e.

Floor value convertible bond.

Convertible bonds are safer than preferred or common shares for the investor. The floor value of the convertible bond is the lowest value to which the bond can drop and the point at which the conversion option. It is the lowest market value that the bond can have. To estimate the bond investment value one has to determine the required yield on a non convertible bond.

Issued a convertible bond with a 1 000 face value that pays 4 interest. The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment. As an example let s say exxon mobil corp. The bond has a maturity of 10 years and a.

Convertible bonds are a hybrid debt instrument issued by a corporation that can be converted to common stock at the discretion of the bondholder or the corporation once certain price thresholds are achieved. A technology company issued 100 million in convertible bonds on 1 january 20x1 with a maturity date of 31 december 20y5. They provide asset protection because the value of the convertible bond will only fall to the value of the bond floor. However in reality if stock price falls too much the credit spread will increase and the price of the bond will go below the bond floor.

The convertible bond will outperform the company s stock when the stock declines in value because the convertible has a price floor equal to the straight bond value. Convertible bonds can be an option for those who want to invest in the stock market but are worried about losing money. The value of a straight bond. Example of a convertible bond.

While the rewards are not as great the risks are less. Bond investment value value as a corporate bond without the conversion option based on the convertible bond s cash flow if not converted. Floor value the floor value of a convertible bond is the greater of 1. Usually bond holders will be expecting to convert because they are expecting that the shares will be worth more than the cash alternative and so you would usually expect the actual market value to be higher than the floor value.

It is calculated assuming that the holders take cash on redemption rather than convert. The convertible bond will underperform the company s stock when the stock appreciates significantly because the investor paid a conversion premium on the convertible bond. The bond floor is the value at which the.