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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!!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.
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