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.

Floor value of convertible bond calculation.

It s important to know how to calculate this value so that you can sell or convert the bonds while they still retain value. Concluding the example divide 1 000. To estimate the bond investment value one has to determine the required yield on a non convertible bond. You will receive your principal on a specified maturity date.

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. Where cv stands for conversion value and bv stands for bond value without the conversion feature i e. The last date of conversion is 31 december 20y0.

The value of a straight bond. Convertible bonds unlike more typical stock shares have a floor value. A technology company issued 100 million in convertible bonds on 1 january 20x1 with a maturity date of 31 december 20y5. The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment.

But your profit will still be the bond s yield. The bond floor is the value at which the. The financial worth of the securities obtained by exchanging a convertible security for its underlying assets. It is the lowest market value that the bond can have.

It is calculated assuming that the holders take cash on redemption rather than convert. Convertibles are a category of financial instruments such as. 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.