Work out the parts that make up a convertible bond's value and explain what they mean
The idea
Conversion value is the conversion ratio multiplied by the share price. A convertible's minimum value is the higher of its conversion value and its straight value, the value of the same bond without the conversion option. The market conversion price is the convertible's price divided by the conversion ratio; the market conversion premium per share is that minus the share price, and the premium ratio divides it by the share price. The premium over straight value, convertible price ÷ straight value − 1, measures downside risk to the bond floor. Candidates mix up the bases: the conversion premium ratio uses the share price, not the conversion price.
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Take the free diagnostic →More in Valuation and Analysis of Bonds with Embedded Options
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