I think when calculating with the effective rate of 7.67%, instead of using 93.85, we need to use 94.8 for the b/f figure for the liability component. So by the end of Yr 3, the balance c/f will equal not to NIL, but to the Equity Component figure of approximately 5.15 to 5.38 (rounding error).
Hi Sir, the concept I have of convertible bonds is that, they usually have a lower rate of return compared to similar bonds with no conversion option & that is because of the added advantage of equity option in the bond. Keeping this in mind, I thought that we calculate the present obligation by calculating PV of future cash flows, discounting them by the rate of the convertible bond, but as you mentioned that the rate of a similar non-convertible bond will be used for discounting, I don’t understand why not the rate of convertible bond is used in discounting?
jasm says
How do you get the 7.67%?
jasm says
I just realised the effective rate of interest on the debt of 7.67% shown in the lecture is different from the notes which is 6.34%.
jahanzebmk says
yes i think he did the mistake . of not using 6.34%
lisa200 says
Completely lost towards the middle and end of these calculations (the issue cost !)
okssana says
I found on the forum that the correct answer is in the notes – it also gives “nil” if you start with 90,4.
amirulez says
i am confused between answer in lecture and the notes. in lectures it is easy to understand, but now i don’t which one is the correct answer.
Steve says
This lecture doesn’t match the answer in the P2 notes.. Something has gone wrong somewhere.
diyez12 says
I think when calculating with the effective rate of 7.67%, instead of using 93.85, we need to use 94.8 for the b/f figure for the liability component. So by the end of Yr 3, the balance c/f will equal not to NIL, but to the Equity Component figure of approximately 5.15 to 5.38 (rounding error).
diyez12 says
There’s sth wrong with the calculation for convertible debentures example.. it’s not the same as solutions in the lecture notes..
Mahrukh says
Hi Sir, the concept I have of convertible bonds is that, they usually have a lower rate of return compared to similar bonds with no conversion option & that is because of the added advantage of equity option in the bond.
Keeping this in mind, I thought that we calculate the present obligation by calculating PV of future cash flows, discounting them by the rate of the convertible bond, but as you mentioned that the rate of a similar non-convertible bond will be used for discounting, I don’t understand why not the rate of convertible bond is used in discounting?
shernelle says
Thought the issue cost was suppose to be net with the proceeds? So you would use 99 instead of 100?