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Hi,
I was going through the Bento Co. Question where the requirement was to show calculations whether the restrictive covenent imposed by Dofu Co. is likely to met and I wasn’t able to understand the calculations when I came across the value of 6% convertible bond.
The problem was that I wasn’t able to understand why the value of convertible bond in the calculation is $20m each year for the 4 years when interest on convertible bond is also given then why didn’t we work out the closing balance of the loan at the end of each year like the calculations shown for the other 8% $30m bond?
Kindly explain me the reason for using the value of convertible bond at $20m each year?
It is because the question says that the interest on this bond is paid annually (as is usually the case). Because the interest is paid each year it is not added to the amount owing.
The 8% loan is different because the question specifically says that the interest is added to the amount outstanding each year.
I understood your explanation for the $30m 8% bond BUT for the 6% $20m convertible bond
The question says that, ” $20 million loan in the form of a 6% convertible bond on which interest is payable annually”.The wording of the question for the 6% convertible bond says that the interest is PAYABLE (not paid) annually (same casual wording used normally for loans in questions where we work out the closing balance) , so how we come to know that interest which was payable was actually paid at the year end as this is not explicitly stated that interest is PAID annually instead the question says that interest is payable annually.
Is this an assumption you are taking or its just a normal way of asking the the question and if i am wrong in understanding the requirement . Please clarify or tell me where i am getting it wrong?
The word payable means that it is paid each year and not simply added to the amount owing. Whether it is paid at the end of the year or a few days after then end of the year makes no difference.
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