By George A Philips
The convertible bond industry has lately received expanding value on an international foundation with really striking progress between very quickly transforming into businesses hungry for capital. Philips' Convertible Bond Markets is a complete evaluation of this industry position, illustrating essentially how traders of all probability persuasions might top utilise the device. will probably be of serious curiosity either to lecturers and to execs together with fairness fund managers, bond fund managers, 'swaps' groups, inventory mortgage departments, possibility controllers, treasurers and proprietary traders.
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Extra info for Convertible Bond Markets
To exercise the option, the investor has to outlay the present value of the conversion price, not the actual conversion price. The option component is trading at its discounted parity. In portfolio 2, it is assumed that the investor holds a straight bond trading at 80 and redeems at 100, which is equal to the conversion value. At present, 80 is the present value of the conversion value. In addition, the investor holds a warrant trading at the money, priced at 20. Warrants are normally issued attached to a straight bond and are referred to as 'cum' in this state.
75. 'Backward induction' is then used to calculate the values at each node. Consider valuing the straight bond at the ninth step or after four and a half years. 75 coupon. 4 illustrates the example now as a straightforward convertible bond with share price and conversion price equal to 100 in the present time period. 25. 75 in the downstate. Now we know the calculation for the fair present convertible bond value but what rate of discount should be used? We do have a problem. At all nodes, should we discount by a credit adjusted interest rate when in fact this should not always be the case?
The example we consider is a seven year bond, with a 4% coupon, 22% issue premium. 25. The put is set in many examples such that the security yields a given number of basis points over the benchmark US Treasury bond. Note what have we done by introducing a put feature. 93, and the probability of dilution has been considerably reduced as a result. ORIGINAL ISSUE DISCOUNT NOTE All the convertibles so far considered have been issued at 100 or 'par'. This need not be the case. We now consider what are referred to as 'Original Issue Discount' (OlD) notes.
Convertible Bond Markets by George A Philips