The bond floor is the value at which the.
Convertible bond floor price.
The lowest value that convertible bonds can fall to given the present value of the remaining future cash flows and principal repayment.
Concluding the example divide 1 000.
The floor value of the convertible bond is the lowest value to which the bond can drop and the point at which the conversion option.
The par value of convertible bond per share of common stock is called the conversion price i e.
The convertible bond will outperform the company s stock when the stock declines in value because the convertible has a price floor equal to the straight bond value.
The bond has a maturity of 10 years and a convertible ratio of 100 shares for every convertible bond.
If the bond is held until maturity the investor will be paid 1 000 in principal plus 40 in.
The convertible bond will underperform the company s stock when the stock appreciates significantly because the investor paid a conversion premium on the convertible bond.