Floor Value Of Convertible Bond Calculation

It is calculated assuming that the holders take cash on redemption rather than convert.

Floor value of convertible bond calculation.

Divide the convertible bond s face value by your step 5 result and add this calculation s result to your step 8 result to figure the bond s floor value. It s important to know how to calculate this value so that you can sell or convert the bonds while they still retain value. The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment. Convertible bonds unlike more typical stock shares have a floor value.

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. Convertibles are a category of financial instruments such as. But your profit will still be the bond s yield. The bond floor is the value at which the.

You will receive your principal on a specified maturity date. To estimate the bond investment value one has to determine the required yield on a non convertible bond. A technology company issued 100 million in convertible bonds on 1 january 20x1 with a maturity date of 31 december 20y5. 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 becomes worthless.

The value of a straight bond. If the stock value of your convertible bond is dropping you won t be able to convert the bond to stock. Bond investment value value as a corporate bond without the conversion option based on the convertible bond s cash flow if not converted. The financial worth of the securities obtained by exchanging a convertible security for its underlying assets.

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. Concluding the example divide 1 000. 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. Floor value the floor value of a convertible bond is the greater of 1.