Coupon rate of convertible bond is lower. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature.

How do you calculate the value of convertible bonds?

The conversion price of the convertible security is the price of the bond divided by the conversion ratio. If the bonds par value is $1000, the conversion price is calculated by dividing $1000 by 5, or $200. If the conversion ratio is 10, the conversion price drops to $100.

How much does a convertible bond cost per share?

Basic convertible bonds calculations stock price $30.00 per share stock dividend $0.50 per share convertible market price $1,000 coupon rate 7.00% maturity 20 years conversion price $36.37 Stock dividend yield = annual dividend rate / current stock price = $0.50 / $30.00 = 1.67%

Why do convertible bonds have a longer life?

This is because higher coupon bonds deliver more cash flows near the start of the bond’s life. yWith convertible feature, the higher coupon rate may lead to lower propensity to convert. The CB then has a longer life, so this leads to higher duration. These two effects are counteracting. 17 Interest rate sensitivity 1.

What does Conv stand for in convertible bonds?

conv = value of stocks received if conversion takes place call = call price roll = value given by the rollback (neither converted nor recalled) At each node, the optimal strategy of the holder is exemplified by taking the maximum of min(roll, call) and conv.

What is the interest rate sensitivity of a convertible bond?

The approximation for the convertible bond’s interest rate sensitivity where C= conversion value and I= investment value. • The equity component of the convertible bond may dampen the convertible’s interest rate sensitivity, depending on the bond’s equity participation.