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  • Tutorial 5

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    JIA ERN GOH
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    The document calculates the market value of a bond that can be converted to shares. It finds that converting the bond after 5 years at a conversion price of 121.94 per share provides a higher value than redeeming the bond at par. Alternatively, if the share price in 5 years is lower, the floor value is redeeming the bond at 100. There is currently a conversion premium of $34.84 or $1.74 per share over converting the bond immediately.

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    The document calculates the market value of a bond that can be converted to shares. It finds that converting the bond after 5 years at a conversion price of 121.94 per share provides a higher value than redeeming the bond at par. Alternatively, if the share price in 5 years is lower, the floor value is redeeming the bond at 100. There is currently a conversion premium of $34.84 or $1.74 per share over converting the bond immediately.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    3 views2 pages

    Tutorial 5

    Uploaded by

    JIA ERN GOH
    The document calculates the market value of a bond that can be converted to shares. It finds that converting the bond after 5 years at a conversion price of 121.94 per share provides a higher value than redeeming the bond at par. Alternatively, if the share price in 5 years is lower, the floor value is redeeming the bond at 100. There is currently a conversion premium of $34.84 or $1.74 per share over converting the bond immediately.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 2

    Market Value

    Expected share price in 5 years' time

    4.45 X 1.065^5 = 6.10


    Conversion value rate = 20
    Conversion Value = 121.94
    Conversion at 121.94 is better than redeem the bond at par

    Assuming that the share price of 121.94 in 5 years is correct


    The current market value of the bond will the as follows

    1 2 3 4 5
    Interest received 9.00 9.00 9.00 9.00 9.00
    Conversion in 5 years 121.94
    Annual cash flow 9.00 9.00 9.00 9.00 130.94
    Discount @ 7% 0.9346 0.8734 0.8163 0.7629 0.7130
    PV of Cash Flow 8.41 7.86 7.35 6.87 93.36
    PV of Bond 123.84

    Floor Value

    Assuming that the total share value of 20 shares 5 years is lower than 100, investor not convert to shares
    Therefore, the current market value of the bond will the as follows

    1 2 3 4 5
    Interest received 9.00 9.00 9.00 9.00 9.00
    Redemption in 5 years 100.00
    Annual cash flow 9.00 9.00 9.00 9.00 109.00
    Discount @ 7% 0.9346 0.8734 0.8163 0.7629 0.7130
    PV of Cash Flow 8.41 7.86 7.35 6.87 77.72
    PV of Bond 108.20

    Conversion premium

    Current market value of the bond 123.84


    If convert to 20 shares now = 20 X 4.45 = 89.00
    Conversion premium 34.84
    Conversion premium per share 1.74

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