Convertible Bonds

Question 1

Conversion Ratio

Answer 1

Number of shares bond can be converted into

Question 2

Conversion Price

Answer 2

Face value of bond / price

Question 3

stock-price > conversion price

Answer 3

convert because share value is greater than face value

Question 4

stock-price < conversion price

Answer 4

accept payment on the bond

Question 5

conversion premium

Answer 5

% increase you need stock to appreciate from conversion price

Question 6

convertibles and shareholder position

Answer 6

dilutes position by increasing shares outstanding

Question 7

convertible bonds and mgmt

Answer 7

reduces payment to bondholders, good

Question 8

Bond sale price floor

Answer 8

larger of straight bond value and conversion value

bond will trade above floor if there’s more TTM

Question 9

Upside / downside of bonds

Answer 9

downside: ballon pmt option provides protection against swings in stock prices
upside: increases in stock price make conversion more valuable

Question 10

Converting before maturing

Answer 10

not ideal but could lessen a loss