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Hello,
i though conversion premium is the difference between converting shares today and converting them at redemption date in case of convertible bonds.In December 2007, Q1(b)
Examiner found coversion premium by deducting Conversion value at current date from Market value of bond to reach conversion premium…?Do we have to deduct current conversion value from market value of bond to reach conversion premium?
The conversion premium is the difference between the current MV of the bond, and the current MV of the shares that the bond can be converted to.
Sir, since you wrote above that the conversion premium is:
the difference between the current MV of bond, and the current MV of the shares that the bond can be converted to.
Then it means that first we’ll calculate market value (suppose it’s 150$) of convertible by calculating npv using best option (either redemption or conversion).
Then calcuate PRESENT VALUE of conversion value (suppose 5shares x 80$ = 400$ future value and pv is suppose 200$)
Thus conversion premium will be 200-150= 50$.
Am i right?I need to know whether simply current market value of shares that bond can convert to will be used or they should be converted to present value and then be used?
It is the current MV of the shares that the bond can be converted to that is used.
Ok, for conversion premium calculation: We shall find difference of it with market value of bond by calculating npv using best option (either redemption or conversion)
So when the best option is conversion we’ll find market value of bond on the basis of it, and compare it with current market value of shares the bond can be converted to.
I.e market value of bonds (using conversion option) – simple market value of shares the bond can be converted to
Right?
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