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Dear sir,
I have the following questions regarding the convertibles:
1. For convertibles, we have only redeemable debts. We do not have any irredeemable debts in convertibles because in that case there will be no option available to the investor to convert. Please confirm it.2. The Floor value of convertibles is the other minimum guaranteed MV that is not chosen. It is usually MV without conversion. Please confirm it.
3. If cash is chosen over conversion, then we will calculate the MV of each $100 convertible loan note based on cash option by discounting the redemption and its interest payment?
Thanks a million,
1. Correct. Irredeemable debt is never repaid – whether in cash or in shares.
2. Correct (although not ‘usually’ but ‘always’ – it is the MV on the basis that cash is taken on redemption rather than shares.)
3. The MV is based on what investors expect they will do (they won’t decide until the redemption date comes). If they expect that they will take cash then the MV will be the PV of the interest receipts and the cash on redemption.
Have you watched my free lectures on the valuation of debt? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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