Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 8QTD
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Question
(2) What is the convertible’s straight-debt value?
What is the implied value of the convertibility
feature?
Expert Solution
Step 1
Convertible’s straight-debt value
Alike to a straight debt security, a convertible note has a notional (or principal) amount, coupon payments, and a stated maturity. Unlike a straight debt security, a convertible note provides the holder with the option to exchange or convert the bond for a specified or predetermined number of shares of the company’s stock.
The conversion price is the rate at which the convertible note can be transformed or converted into company’s stocks. The conversion price is usually higher than the stock price as of the issuance date.
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