Floor Value Convertible Bond

Example of a convertible bond.

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. 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 have a floor value which makes it very unlikely the investor will lose money on them. They provide asset protection because the value of the convertible bond will only fall to the value of the bond floor.

Issued a convertible bond with a 1 000 face value that pays 4 interest. It is calculated assuming that the holders take cash on redemption rather than convert. Bond investment value value as a corporate bond without the conversion option based on the convertible bond s cash flow if not converted. 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.

As an example let s say exxon mobil corp. 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 these payments represents a convertible bond s floor or minimum value. The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment.

A technology company issued 100 million in convertible bonds on 1 january 20x1 with a maturity date of 31 december 20y5. To estimate the bond investment value one has to determine the required yield on a non convertible bond. Floor value the floor value of a convertible bond is the greater of 1. It should trade for at least its floor value regardless of how low the stock drops.

The value of a straight bond. The bond floor is the value at which the. While the rewards are not as great the risks are less. 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.

It is the lowest market value that the bond can have. 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 has a maturity of 10 years and a.