Convertible bond- premium over straight value “holding all other factors constant, the greater premium over straight value, the less attractive the Convertible bond.” i dont understand. I think, straight value is the floor of CB, so the lower the floor, the more increase room the CB has. Can someone help me explain this with a example? thx!
Market price of bond = 1000. scenario 1: # of share: 10 @ $50 each. Total conversion price = $500. scenario 2: # of share: 10 @ $95 each. Total conversion price = $950. which one is better?
i dont know. i am stupid. haha from the formula, i guess b. dont laugh at me!
The greater the premium, there is less of upside return compared to a bond without the conversion option which would lead to less attractiveness of the bond However , due to the straight value it protects the downside risk.
Just think of what the statement is saying. Would you possibly want to pay more of a premium on anything when you don’t have to? When you go to purchase a car are you going to tell the dealer to mark up it up even more?
up. can someone explain further?
Premium over straight value measures your downside risk. The higher this number, the higher your downside risk. So if you buy a CB for $1100 with a straight value of $1000, your premium over straight value is: 10% Now if you buy that same bond for $1200 with a straight value of $1000, your premium over straight value is: 20% So, here your premium over straight value has gone up. This is becuase your price you paid has gone up. In scenario 2, your downside is $200 which is a greater downside than scenario 1 ($100), therefore the bond in scenario 2 is less attractive since the downside is greater (the greater premium in scenario 2 reflects this)