How are convertible bond prices quoted?
Features of Convertible Bond The market price is always quoted as percentage of the nominal value, which means you have to pay $1000 to buy this bond at issue. Like a straight bond, it pays you coupon semi-annually, so each coupon payment will be 1000*3.75%/2 = $18.75.
How do you calculate the value of convertible bonds?
The conversion price of the convertible security is the price of the bond divided by the conversion ratio. If the bonds par value is $1000, the conversion price is calculated by dividing $1000 by 5, or $200.
What is the face value of a convertible bond?
When you buy a convertible bond, it starts out working just like any fixed income security. As with most bonds, par value—the face value of the bond—is usually $1,000. The issuing company pays interest on the bond, which is called the coupon rate.
How do you calculate convertible bond ratio?
Convertible Bonds The conversion ratio can also be found by taking the bond’s par value, which is generally $1,000, and dividing it by the share price. A stock trading for $40 has a conversion ratio equal to $1,000 divided by $40, or 25.
How do you calculate conversion premium percentage?
Conversion premium is the comparison between current price of debt (bonds) and conversion price.
- Conversion Premium = Market Price – Conversion Price.
- Market price: is the market value of the debt security.
- Conversion Price: is the market value of converted security (equity)
What is the straight bond value of a convertible bond?
Converting Convertibles The straight-bond value is the value of the convertible if it did not have the conversion option. The conversion value, on the other hand, is equal to the conversion ratio multiplied by the common stock’s market price.
Would the coupon rate for a convertible bond be lower or higher than the rate for a traditional bond?
Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature. This enables the issuer to save on interest expenses, which can be substantial in the case of a large bond issue.
Are convertible bonds considered equity?
A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. The conversion from the bond to stock can be done at certain times during the bond’s life and is usually at the discretion of the bondholder.
How do I value my convertible notes?
The basic concept for valuing a convertible note is the same in theory as the valuation of any other financial asset. The value of the note is equal to the present value of the future income that the convertible note will receive, discounted to the present value based on its associated risk.
How do you calculate conversion premium on a convertible bond?
The conversion premium is the premium the bondholder will have over the conversion value. If the bond is currently selling for $1,200, then the conversion premium can be calculated as $1,200 – $1,000 = $200.
What is the conversion ratio of a convertible bond?
The conversion ratio is the number of common shares received at the time of conversion for each convertible security, such as a convertible bond. The ratio is calculated by dividing the convertible security’s par value by the conversion price of equity.
Why are convertible bonds cheaper?
Convertible bonds offer lower interest rates than comparable conventional bonds, so they’re a cost-effective way for the company to raise money. Their conversion to shares also saves the company cash, although it risks diluting the share price.
When do convertible bonds get a soft call?
“Soft-call” in convertible bonds (CBs) usually means that the bond can be recalled by the issuer only if the stock price has previously closed above a specified trigger price for any 20 out of any 30 consecutive trading days.
What happens when a convertible bond is called back?
The bond is embedded with a call option (known as a soft call) giving the right to the issuer to call it back, if the call trigger is breached and pay the bondholder an early redemption amount. Otherwise, the convertible bond cannot be called back and the bondholder cannot be compelled to convert it into shares.
What do you need to know about soft call protection?
Soft call protection requires the bond issuer to pay a premium to the bond’s principal value if the bond is called in early. As an example, to call a hypothetical bond issue early, the issuer is required to pay 103 percent of the principal amount.
What is the conversion ratio for convertible bonds?
Say a company issues a $1,000 convertible bond for stock that’s trading at $50 per share. If you purchase one of those bonds, you would have the opportunity to convert it to 20 shares of common stock in the company. That’s based on the conversion ratio of $1,000 divided by $50.