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.
Cumulative three year annuity factors:
5% 2.723
9% 2.531
Ask the Tutor ACCA SBR
Financial Instruments
Please Sir, help me with a clear (step by step) explanation on how to answer the above question.
I tried looking at the answer but I still couldnt figure out how they arrived at the workings and answer in general.
Best Regards
5y ago#2I'm guessing that you are following the method in our course notes (page sixty something) and that you have watched the online lecture.
On that basis please type in your answer and I will have a look.
You need to be specific as to where you are getting stuck.
I actually watched the online lecture again and got it right.
I did the discounting factors for the 3 years and I got the same answer provided in the kit. But I still don't understand how they used the annuity factor provided in the question to arrive at the answer - in case of an exam situation.
100,000 x 1/1.09 - yr 1
100,000 x 1/(1.09)^2 - yr 2
2,100,000 x 1/(1.09)^3 - yr 3
Financial Liability = $1.797m
Equity = $0.203m (balancing figure)
Good morning Sir
5y ago#4I would have done exactly what you did - much easier than trying to get your head round the annuity factor. (If you need advice on the logic of annuity factors, ask on the FM Ask A tutor, as my colleague knows far more about them than I do!
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