Floor Value Convertible Bond

Issued a convertible bond with a 1 000 face value that pays 4 interest.

Floor value convertible bond. It is the lowest market value that the bond can have. They provide asset protection because the value of the convertible bond will only fall to the value of the bond floor. The bond floor is the value at which the. The value of these payments represents a convertible bond s floor or minimum value.

Convertible bonds are a hybrid debt instrument issued by a corporation that can be converted to common stock at the discretion of the bondholder or the corporation once certain price thresholds are achieved. However in reality if stock price falls too much the credit spread will increase and the price of the bond will go below the bond floor. Bond investment value value as a corporate bond without the conversion option based on the convertible bond s cash flow if not converted. It should trade for at least its floor value regardless of how low the stock drops.

It is calculated assuming that the holders take cash on redemption rather than convert. The convertible bond will outperform the company s stock when the stock declines in value because the convertible has a price floor equal to the straight bond value. The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment. While the rewards are not as great the risks are less.

Example of a convertible bond. Convertible bonds can be an option for those who want to invest in the stock market but are worried about losing money. The value of a straight bond. Floor value the floor value of a convertible bond is the greater of 1.

The floor value of the convertible bond is the lowest value to which the bond can drop and the point at which the conversion option. The convertible bond will underperform the company s stock when the stock appreciates significantly because the investor paid a conversion premium on the convertible bond. Convertible bonds have a floor value which makes it very unlikely the investor will lose money on them. 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.

To estimate the bond investment value one has to determine the required yield on a non convertible bond. As an example let s say exxon mobil corp. Convertible bonds are safer than preferred or common shares for the investor.