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Abrar Co has 6% convertible loan notes in issue with a floor value of $106.20 per
$100 loan note. Each loan note can be converted into 15 ordinary shares at any time
or redeemed in five years’ time at nominal value.
What is the minimum share price at which investors would convert their loan
notes (to two decimal places)?I don’t understand why they divide the floor value by 15 to get the answer. Also, how would the answer differ if loan notes could be converted into share in 5 years’ time instead of “at any time”
Convertible into 15 shares or at $100
So divide the 106.20 by 15 this gives you the share price which makes sense to covert
This is $7.08
Have you not watched our video on conversion of convertible debt
The floor value is the present value of the redemption option of the loan note.
Usually, bond holders will be expecting to convert because they are expecting that the shares will be worth more than the cash alternative, and so you would usually expect the actual market value to be higher than the floor value.
Thank you! Would the answer change if the question stated that the loan notes could be converted into shares in 5 years’ time instead of “at any time”?
The note holders have the right to convert the loan into the company’s equity at their discretion as well as a specified time. So this means conversion can be triggered automatically by certain events. Such as the company raising finance above a certain threshold by a certain date, or the company being sold.
So in other words look at the question see what it says!!!
It will be clear and give a specific date.
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