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Hi
on question B you are asked to calculate market value, floor value and conversion premium.
If the conversion worked out that redeeming the bonds is better then conversion of shares would this mean that the value of shares would be the floor value and the market value would be the bonds redeemed?
If possible in simple words could you just give a definition of floor value and conversion premium please?
Thank you
JemmaThe floor value is the lowest value that the bond could fall to.
With convertibles, the investor will have the choice as to whether to take cash or to take shares when it comes time to convert.
The worst that can happen is that they take cash (because the shares end up being worth less).So the floor value is the value the bond would be on the assumption they were going to take cash (i.e. the present value of future receipts assuming that the receipt on redemption was cash not shares).
The conversion premium is the difference between the current market value of the bond, and the current market value of the shares into which it can be later converted.
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