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Hi Chris,
I have a question regarding this excercise:
* why do we use the prevailing market interest to calculate the interest annuity?
* why the 202,53 (2m- 1,797,467) are booked in equity?Baldie? Co? issues? 4,000? convertible? bonds? on? 1? January? 20X2? at? par.? The? bonds are?redeemable?three?years?later?at?a?par?value?of?$500?per?bond,?which?is?the?nominal?value.?The?bonds?pay?interest?annually?in?arrears?at?an?interest?rate?(based?on?nominal?value)?of?5%.?Each?bond?can?be?converted?at?the?maturity?date?into?30?$1?shares.?The?prevailing?market?interest?rate?for?three?year?bonds?that?have?no?right?of?conversion?is?9%.?Required?Show?how?the?convertible?bond?would?be?presented?in?the?statement?of?financial?position?at?1?January?20X2.? ?(3?marks)?Cumulative?three?year?annuity?factors:?5%? 2.723?9%? 2.531
(Working)?1,797,467)? 202,533Working:?Fair?value?of?equivalent?non-convertible?debt???$????????Present?value?of?principal?payable?at?end?of?3?years?1,544,367???(4,000???$500?=?$2m???31(1.09))Present?value?of?interest?annuity?payable?annually?in?arrears????for?3?years?[(5%???$2m)???2.531]????253,100??1,797,467
Thanks for your help! 🙂
Hi,
Can you please repost the question without all the question marks in it as I cannot read it.
Thanks
Hi Chris,
Here I go again sorry for the questions marksI have a question regarding this excercise:
* why do we use the prevailing market interest to calculate the interest annuity?
* why the 202,53 (2m- 1,797,467) are booked in equity?Baldie Co issues 4,000 convertible bonds on 1 January 20X2 at par.The bonds are redeemable three years later at a par value of $500 per bond,which is the nominal value.The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 5%. Each bond can be converted at the maturity date into 30 $1 shares.The prevailing market interest rate for three year bonds that have no right of conversion is 9%. Required Show how the convertible bond would be presented in the statement of financial position at 1 January 20X2.(3marks) Cumulative three year annuity factors:5% 2.723?9% 2.531
(Working)?1,797,467) 202,533Working: Fair value of equivalent non-convertible debt $Present value of principal payable at end of 3 years 1,544,367(4,000$500= $2m 31(1.09))Present value of interest annuity payable annually in arrears for 3 years [(5%$2m)2.531] 253,100 1,797,467
Thanks!
Hi,
Thanks for reposting, not sure where all those question marks came from!?!?!?
To calculate the liability element of the convertible bond we discount at the market rate for similar debt without the conversion option. They have just tried to phrase it slightly differently to try to confuse the issue. By saying prevailing they are just saying that it is the rate currently, so therefore we use it to do the discounting.
Remember that once we calculated the value of the debt, the value of the equity is the difference between the proceeds and the value of the debt. Given the bonds were issued at par then this is the 2,000,000 (4,000 bonds at $500 each).
Hope that clears it all up.
Thanks
Chris
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