Teaching Note on Convertible Bonds University （注意在可转换债券大学教学）.pdfVIP

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Teaching Note on Convertible Bonds University （注意在可转换债券大学教学）.pdf

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Teaching Note on Convertible Bonds University （注意在可转换债券大学教学）

Copyright © by Zhi Da and Ravi Jagannathan Teaching Note on Convertible Bonds This version: Aug 5, 2004 Prepared by Zhi Da1 1. Introduction Convertible bonds combine the features of bonds and stocks in one instrument. It is a bond that gives the holder the right to convert or exchange the par amount of the bond for common shares of the issuer at some fixed ratio during a particular period. As bonds, they have some characteristics of fixed income securities. Their conversion feature also gives them features of equity securities. 2. Features of Convertible Bond 2.1 An example of a simple convertible bond On Sep 2003, Primus Telecom issued the following convertible bond. Size: US$ 110 million Term: 7 years Redemption date: 15 Sep 2010 Nominal value: US$ 1000 Interest coupon: 3.75% Conversion price: US$ 9.3234 Conversion ratio: 107.257 Market price at issue: 100 Bloomberg Ticker PRTL 3.75 09/10 This is the most elementary example of convertible bond. The bond has a nominal (or par) value of $1000. The market price is always quoted as percentage of the nominal value, which means you have to pay $1000 to buy this bond at issue. Like a straight bond, it pays you coupon semi-annually, so each coupon payment will be 1000*3.75%/2 = $18.75. In addition, it allows you to exchange the bond for 107.2570 shares anytime before maturity, which is 09/15/10. If the bond is not converted, it will be redeemed a