Convertible Bond Floor Price

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.

Convertible bond floor price.

The bond has a maturity of 10 years and a convertible ratio of 100 shares for every convertible bond. The par value of convertible bond per share of common stock is called the conversion price i e. Concluding the example divide 1 000. 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.

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 lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment. 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. If the bond is held until maturity the investor will be paid 1 000 in principal plus 40 in.