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Convertible Bonds

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Convertible Bonds

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • April 18, 2021 at 7:29 pm #618142
    mainganha0912
    Participant
    • Topics: 3
    • Replies: 1
    • ☆

    Hello I want to ask about this question, please help me!
    consider a 12% convertible bond, redeemable at nominal at 5 years time , which can be converted at any time in the nexf 3 years into 40 ordinary shares. the bond is currently trading at ex-interest at 130$ and the current ordinary shares is 3$. the market value of the share is expected to grow by 4% per year. asume the required return rate is 14% and the investor is considering to convert the bond in the year 3 or redeem it in year 5. The par value is 100$ Which option is better ?
    thank youguys so much!!

    April 19, 2021 at 8:51 am #618178
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers and explanations
    🙂

    If they convert the bond is 3 years time they will get shares worth 40 x $3 x 1.04^3 = $134.98

    If they wait 5 years they will receive extra interest of $12 per year for each of time 4 and time 5 and then will receive the repayment of $100. That is a total of only $124 even before discounting for the extra time (which would make it worth less).

    So on the current expectations, they would be better to convert in 3 years time (although, of course, they will not have to make the decision ‘now’ but only in 3 years time)

    I do not know where you found this question, but it is based on a past Paper FM (was F9) exam question, and is not really the sort of question that is asked in Paper AFM.

    April 19, 2021 at 10:40 am #618191
    mainganha0912
    Participant
    • Topics: 3
    • Replies: 1
    • ☆

    Thank you so much??

    April 19, 2021 at 1:53 pm #618214
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Convertible Bonds’ is closed to new replies.

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