Floor Value Of Convertible Bond Calculation

You will receive your principal on a specified maturity date.

Floor value of convertible bond calculation.

Convertibles are a category of financial instruments such as. The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment. The bond floor is the value at which the. A technology company issued 100 million in convertible bonds on 1 january 20x1 with a maturity date of 31 december 20y5.

Convertible bonds unlike more typical stock shares have a floor value. To estimate the bond investment value one has to determine the required yield on a non convertible bond. The last date of conversion is 31 december 20y0. It is the lowest market value that the bond can have.

Bond investment value value as a corporate bond without the conversion option based on the convertible bond s cash flow if not converted. 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 financial worth of the securities obtained by exchanging a convertible security for its underlying assets. 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.

Where cv stands for conversion value and bv stands for bond value without the conversion feature i e. If the stock value of your convertible bond is dropping you won t be able to convert the bond to stock. Concluding the example divide 1 000. 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 value of a straight bond. 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. 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. 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.