Chap20Notes

Chap20Notes - What is a convertible bond? A Convertible...

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1 What is a convertible bond? A Convertible Bond is a corporate bond that can be converted - at the option of the bond holder - into a predetermined number of shares of common stock of the issuing company. A convertible bond allow you to exchange the remaining coupon payments and the par value of the bond for the residual profits of the firm. Conversion Ratio: The number of shares of common stock that the bondholder receives in exchange for each bond. Convertible Bond Terms Conversion Price = par value / conversion ratio At the time of issuance of a convertible bond, the issuer has effectively granted the bondholder the right to purchase the common stock at the conversion price . Along with the conversion privilege granted to the bondholder, most convertible bonds are also callable. The Conversion Value of a convertible bond is the value of the bond if it is converted immediately: Conversion Value = Market price of common stock x Conversion Ratio Straight Value : is the value of an otherwise equivalent
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This note was uploaded on 04/26/2010 for the course FIN 333 taught by Professor Nasseh during the Spring '10 term at Saint Louis.

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Chap20Notes - What is a convertible bond? A Convertible...

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