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.

You will receive your principal on a specified maturity date. But your profit will still be the bond s yield. Concluding the example divide 1 000. Convertibles are a category of financial instruments such as.

Floor value the floor value of a convertible bond is the greater of 1. 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 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. It s important to know how to calculate this value so that you can sell or convert the bonds while they still retain value.

To estimate the bond investment value one has to determine the required yield on a non convertible bond. 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 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. The bond floor is the value at which the. 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 value of a straight bond. It is calculated assuming that the holders take cash on redemption rather than convert. If the stock value of your convertible bond is dropping you won t be able to convert the bond to stock. 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.