- 6 Marks
Question
b. On 1st January 2010, Exchequers Insurance issued a 15% convertible bond quoted at GH₵123. The nominal value for each bond is GH₵100 and the conversion date for the bond is 31st December 2015 after interest has been paid. The bond is convertible at 20 ordinary shares per GH₵100 bond. The current price per share is GH₵6.
Required:
i. Determine the conversion rate. (2 marks)
ii. Determine the conversion premium. (2 marks)
iii. Comment on the possibility of bondholders converting for shares. (2 marks)
Answer
b. convertible bods
(i) 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 𝑥 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜; ₵100 = 20 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠
𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = ₵6
∴ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 20𝑥6 = ₵120
2 marks
(ii) 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚; 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑢𝑝𝑜𝑛 −
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒
𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑜𝑢𝑝𝑜𝑛 = ₵123
𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 = ₵120
∴ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 = 123 − 120 = ₵3
2 marks
iii) The share price is less than the bond market value. This will not be attractive to the
bondholders. The share price have to increase by at least 2.5% [(3/120) x100] for it to
be attractive to bond holders.
2 marks
- Tags: Conversion Premium, Conversion Rate, Convertible Bonds
- Level: Level 2
- Topic: Foreign exchange risk and currency risk management
- Series: NOV 2015
- Uploader: Kwame Aikins