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Dear sir,
I come across the question from kaplan material as follows:
Ishim Co has issued $50 million of 6% convertible bonds at $105 per $100 nominal value. The bonds are convertible in three years’ time into ordinary shares of the company. The conversion rate will be 20 shares for every $100 of convertible bonds. The ordinary shares are currently trading at $4·50 per share. What is the conversion premium (to the nearest cent)?
In this questions, I understand that as the convertible bond is issued at $105 per $100 nominal value => true nominal value of such bond is $105? Is it right?
If my assumption is correct, it means the conversion price = Par value/No. of share on which the convertible bond is converted = 105/20 =5.25
Conversion premium = Conversion price – market share price/market share price = (5.25 -4.5)/4.5 =16.67%
As the solution offers different approach so I don’t know if my assumption is correct
Firstly the nominal value of the bonds is $100 (there is no such term as ‘the true nominal value’!!).
The bonds will have been issued originally at $100, and $105 is their current market value.Secondly, the conversion premium is the difference between the current nominal value of the bonds, and the current value of the shares that they can ultimately be converted into.
Thirdly, how on earth could your answer possibly be correct anyway? The question asks for the premium to the nearest cent but you have calculated a % !!!
You really should watch my free lectures on this – you cannot expect me to type out all of my lectures here 🙂
Dear Sir,
I re-read your instruction regarding conversion premium and find out the right answer. Thank you for your reply and so sorry for making you confused
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