A convertible bond would let the investor exchange it for

#A CONVERTIBLE BOND WOULD LET THE INVESTOR EXCHANGE IT FOR HOW TO#

If the shares are not opted to be converted, the company will have the right to redeem the bonds at par at once. The bonds can be converted into common share after five years at the rate of 20 shares for each US$1,000 of bonds.

#A CONVERTIBLE BOND WOULD LET THE INVESTOR EXCHANGE IT FOR HOW TO#

In order to understand clearly about how to calculate the conversion ratio, conversion value as well as conversion premium, letвЂ™s go through the example below.ДЄBC Limited issues 100 million convertible bond at a coupon rate of 3% per annum. READ: Euro Commercial Paper: All You Need to Know About! The conversion premium formula is as follow:Д¬onversion Premium = Current Market Value of Bond вЂ“ Current Conversion Value We can calculate the conversion ratio by dividing the number of common shares that can be converted with number of bonds.Д¬onversion Ratio = Number of Common Shares/Number of Bonds.Д¬onversion premium is the amount by which the market value of the convertible surpasses the market value of the shares into which the bonds will be converted. The convertible bond conversion ratio refers to the number of shares that a bond can be converted into. The conversion value formula is as follow:Д¬onversion Value = Market Price per Share Г— Conversion Ratio The conversion value is calculated by multiplying the conversion ratio with market price per share at the conversion date. However, this conversion value will be anticipated to increase as the date for conversion nears on the assumption that a companyвЂ™s shares should increase in market value over time. The conversion value will be typically less than the value of the bond at the date of issuance. How to Calculate Conversion Value and Conversion Premium?Д¬onversion value refers to the current market value of ordinary shares into which a bond is to be converted. Investors will hope that the market value of the shares will rise enough to make the market value of the shares into which the bonds will be convertible higher than the value of the convertible. This is since convertibles are issued in the expectation that the share price will rise before the date for conversion. When convertible bonds are issued initially, the market value of the shares into which the bonds will be convertible is always less than the market value of the convertibles. In addition, these bonds give the bondholders the right to convert their bonds at a specified future date into new equity shares of the company, at a conversion rate as specified when the bonds are issued. Typically, the convertible bonds are fixed-rate bonds that have a coupon rate of interest lower as compared to on similar conventional bonds. If the holders of these bonds decide not to exercise their right to convert, then at maturity the bonds will be redeemed. Basically, if the holders of these bonds choose to exercise the right then they will become shareholders in the company, but will have to give up their bonds.

These two definitions have the same meaning. The first definition is that the convertible bonds are one type of bonds that give the right to the bondholder to convert it into other securities (commonly ordinary shares) at a predetermined price (rate) and at a predetermined time.ДЄnother similar definition has defined convertible bonds as bonds that gives right to their holder the right but not the obligation to exercise the right at a specified date in future to convert their bonds into a specific quantity of new equity shares. There are several definition of convertible bonds. In the later section below, we will discuss in detail about convertible bonds including the calculation of conversion ratio, conversion value, conversion premium, conversion price, the convertible bondsвЂ™ value as well as the cost of convertible bond by using the Internal Rate of Return (IRR) method. The bondholders have no right to vote like common shareholders. Basically, an advantage of bond financing is that issuing bonds does not affect owner control. There are several types of bonds one of which is called convertible bonds. The company raises the bonds need to pay fixed interest to bondholders usually semi-annually or annually. Basically, bonds are considered as long-term debt of capital that a company raised in order to get more fund for its investment projects.

A convertible bond would let the investor exchange it for