dividend policy and mv of conertible loan notes

The only explanation I could come up with is, that the company’s dividend policy has a signalling effect on the market value of the share price.

If the dividend policy is such that, the company does not pay out dividend for a long period of time and simultaneously doesn’t report any noteworthy growth in profitability, this would cause the share prices to fall.

And as same as valuing any security, we find out the PV of future income streams discounted by the investors required rate of return. In a convertible bond, the expect future cash flows are the coupon payments + higher of conversion option or capital repayment, if share prices has fallen by the time of maturity, the so does the value of the conversion option.

Because the share price changes, the cash flow on maturity will change as well, therefore changing the PV of the bond and thus the Valuation.

Hope this helped. 🙂