Basic Convertible Pricing

Call
Inputs Strike Option
$50 $8.47
Risk-free rate 5.00%
Credit spread 2.00%
Coupon 3.00%
RFR (CC) 4.88%
Spot 40
Vol 30%
Tenor 5.00
Div. yield 2.00%

Value of the "pure" bond $83.60

Total value of convertible $100.55

 Spot Graph

Call Pure Convertible

Spot Option Bond (aggregate)
$20 $1.07 $83.60 $85.73
Low Delta $22 $1.48 $83.60 $86.56
Calls $24 $1.97 $83.60 $87.54
$26 $2.54 $83.60 $88.68
$28 $3.18 $83.60 $89.97
$30 $3.90 $83.60 $91.41
$32 $4.69 $83.60 $92.98
$34 $5.54 $83.60 $94.69
$36 $6.46 $83.60 $96.53
$38 $7.44 $83.60 $98.48
$40 $8.47 $83.60 $100.55
$42 $9.56 $83.60 $102.72
$44 $10.70 $83.60 $104.99
$46 $11.88 $83.60 $107.35
$48 $13.10 $83.60 $109.80
$50 $14.36 $83.60 $112.33
$52 $15.67 $83.60 $114.93
$54 $17.00 $83.60 $117.60
$56 $18.37 $83.60 $120.34
$58 $19.77 $83.60 $123.13
$60 $21.19 $83.60 $125.98
$62 $22.64 $83.60 $128.88
$64 $24.11 $83.60 $131.83
$66 $25.61 $83.60 $134.82
$68 $27.13 $83.60 $137.85
$70 $28.66 $83.60 $140.92
$72 $30.21 $83.60 $144.03
$74 $31.78 $83.60 $147.17
$76 $33.37 $83.60 $150.34
$78 $34.97 $83.60 $153.54
$80 $36.58 $83.60 $156.76
$82 $38.21 $83.60 $160.01
$84 $39.84 $83.60 $163.28
$86 $41.49 $83.60 $166.58
$88 $43.15 $83.60 $169.89
$90 $44.81 $83.60 $173.22
 2 Shares of
Common Stock
$40.00
$44.00 $180.00
"Busted
$48.00 Convertible"
$160.00
$52.00
$56.00 $140.00
$60.00
$64.00 $120.00
$68.00
$72.00 $100.00

$76.00
$80.00 $80.00

$84.00
$88.00 $60.00

$92.00
$96.00 $40.00
$20 $30 $4
$100.00
$104.00
$108.00
$112.00
$116.00
$120.00
$124.00
$128.00
$132.00
$136.00
$140.00
$144.00
$148.00
$152.00
$156.00
$160.00
$164.00
$168.00
$172.00
$176.00
$180.00
 Spot Graph

$30 $40 $50 $60 $70 $80 $90

Spot
 Pure Bond

Convertible (ag-
gregate)

2 Shares of
Common Stock

$80 $90
 Convertible IRR v. Common Stock IRR

Final Stock
Price
$20
Initial Investment 100 $22
Initial share spot price 40 $24
Number of shares purchased 2.5 $26
Tenor of investment in years 5 $28
Coupon on bond in USD 3 $30
Dividend on shares in USD 2 $32
$34
$36
$38
$40
$42
$44
$46
$48
$50
$52
$54
$56
$58
$60
$62
$64
$66
$68
$70
$72
$74
$76
$78
$80
$82
$84
$86
$88
$90
Stock IRR

IRR
Stocks v. Con
Stocks Convertibles
-10.28% 3.00%
19.50%
-8.71% 3.00%
-7.25% 3.00%
14.50%
-5.87% 3.00%
-4.57% 3.00%
-3.35% 3.00% 9.50%

-2.18% 3.00%
-1.06% 3.00% 4.50%

0.00% 3.00%
1.02% 3.00% -0.50%
$20 $30 $40 $50
2.00% 3.00%
2.94% 3.00% -5.50%
3.85% 3.00%
4.73% 3.00%
-10.50%
5.58% 3.00%
6.40% 3.00%
7.20% 3.74%
7.97% 4.46%
8.72% 5.16%
9.45% 5.85%
10.16% 6.51%
10.86% 7.16%
11.53% 7.79%
12.19% 8.41%
12.84% 9.01%
13.47% 9.60%
14.08% 10.18%
14.69% 10.75%
15.28% 11.30%
15.85% 11.84%
16.42% 12.37%
16.98% 12.90%
17.52% 13.41%
18.06% 13.91%
18.58% 14.41%
19.10% 14.89%
Stocks v. Convertibles IRR

0 $50 $60 $70 $80 $90

Stocks
Convertibles
Stocks
Convertibles
 Deriving Implied Volatility

Call
Inputs Strike Option
$50 $4.08
Risk-free rate 5.00%
Credit spread 2.00%
Coupon 5.00%
RFR (CC) 4.88%
Spot 40
Vol 16.3%
Tenor 5.00
Div. yield 2.00%

Value of the "pure" bond $91.80

Total value of convertible $100.00

 Coupon Determination for Convertible

Call
Inputs Strike Option
$50 $11.57
Risk-free rate 5.00%
Credit spread 4.00%
Coupon 3.00%
RFR (CC) 4.88%
Spot 40
Vol 40%
Tenor 5.00
Div. yield 2.00%

Value of the "pure" bond $76.66

Total value of convertible $99.80

 Reverse Convertible Pricing

Put
Inputs Strike Option
$33.33 $4.05
Risk-free rate 5.00%
Credit spread 2.00%
Coupon 10.00%
RFR (CC) 4.88%
Spot 40
Vol 30%
Tenor 5.00
Div. yield 2.00%

Value of the "pure" bond $112.30

Total value of reverse convertible $100.15

 Reverse Convertible IRR

Final Stock
Initial Investment 100 Price
Initial share spot price 40 $20
Tenor of investment in years 5 $22
Coupon on bond in USD 10 $24
$26
$28
$30
$32
$34
$36
$38
$40
$42
$44
$46
$48
$50
$52
$54
$56
$58
$60
$62
$64
$66
$68
$70
$72
$74
$76
$78
$80
$82
$84
$86
$88
$90
 Reverse Convertible I
Reverse
Convertible 12.00%
IRR
2.37%
3.68% 8.00%
4.93%
6.11%
7.23%
4.00%
8.31%
9.34%
10.00%
10.00% 0.00%
$20.00 $30.00 $40.00 $50.00 $60.00
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
10.00%
Reverse Convertible IRR

$50.00 $60.00 $70.00 $80.00 $90.00

 IRR for Mandatory Convertible

Initial Investment 1000

Tenor of investment in years 5
Dividend on preferred shares in USD 77.50
ertible

Mandatory
Final Stock Convertible Mandatory Con
Price IRR
$20 -2.83% 12.00%
$22 -1.53%
$24 -0.30%
$26 0.87% 8.00%
$28 1.98%
$30 3.05%
$32 4.06% 4.00%
$34 5.04%
$36 5.98%
0.00%
$38 6.88%
$20 $30 $40 $50
$40 7.75%
$42 8.59%
-4.00%
$44 9.41%
$46 10.20%
$48 10.96%
$50 10.96%
$52 10.96%
$54 10.96%
$56 10.96%
$58 10.96%
$60 10.96%
$62 10.96%
$64 10.96%
$66 10.96%
$68 10.96%
$70 10.96%
$72 10.96%
$74 10.96%
$76 10.96%
$78 10.96%
$80 10.96%
$82 10.96%
$84 10.96%
$86 10.96%
$88 10.96%
$90 10.96%
 Mandatory Convertible IRR

$40 $50 $60 $70 $80 $90

$90
 Mandatory Convertible Pricing

Inputs

Risk-free rate 5.00%

Senior credit spread 2.00%
Pref-senior credit spread differential 1.75%
Dividend on preferred 7.75%
RFR (CC) 4.88%
Spot 40
Vol 30%
Tenor 5.00
Div. yield on common 2.00%

PV of 5.75% additional dividend annuity

Total value of calls @ $48 on 25 shares

cing

Call
Strike Option
$48 $9.00

$225.11

$225.02
 Final IRR Comparison

Initial Investment 100

Initial share spot price 40

Number of shares purchased 2.5
Tenor of investment in years 5
Coupon on regular convertible in USD 3
Dividend on common shares in USD 2
Coupon on reverse convertible in USD 10
Dividend on preferred shares in USD 7.75
IRR Comparison

IRR

Final
Stock Common Regular Reverse Mandatory 20.00%
Price Stock Convertible Convertible Convertible
$20 -10.28% 3.00% 2.37% -2.83% 15.00%
$22 -8.71% 3.00% 3.68% -1.53%
$24 -7.25% 3.00% 4.93% -0.30% 10.00%
$26 -5.87% 3.00% 6.11% 0.87%
$28 -4.57% 3.00% 7.23% 1.98% 5.00%
$30 -3.35% 3.00% 8.31% 3.05%
$32 -2.18% 3.00% 9.34% 4.06% 0.00%
$34 -1.06% 3.00% 10.00% 5.04% $20
$36 0.00% 3.00% 10.00% 5.98%
-5.00%
$38 1.02% 3.00% 10.00% 6.88%
$40 2.00% 3.00% 10.00% 7.75%
-10.00%
$42 2.94% 3.00% 10.00% 8.59%
$44 3.85% 3.00% 10.00% 9.41%
$46 4.73% 3.00% 10.00% 10.20%
$48 5.58% 3.00% 10.00% 10.96%
$50 6.40% 3.00% 10.00% 10.96%
$52 7.20% 3.74% 10.00% 10.96%
$54 7.97% 4.46% 10.00% 10.96%
$56 8.72% 5.16% 10.00% 10.96%
$58 9.45% 5.85% 10.00% 10.96%
$60 10.16% 6.51% 10.00% 10.96%
$62 10.86% 7.16% 10.00% 10.96%
$64 11.53% 7.79% 10.00% 10.96%
$66 12.19% 8.41% 10.00% 10.96%
$68 12.84% 9.01% 10.00% 10.96%
$70 13.47% 9.60% 10.00% 10.96%
$72 14.08% 10.18% 10.00% 10.96%
$74 14.69% 10.75% 10.00% 10.96%
$76 15.28% 11.30% 10.00% 10.96%
$78 15.85% 11.84% 10.00% 10.96%
$80 16.42% 12.37% 10.00% 10.96%
$82 16.98% 12.90% 10.00% 10.96%
$84 17.52% 13.41% 10.00% 10.96%
$86 18.06% 13.91% 10.00% 10.96%
$88 18.58% 14.41% 10.00% 10.96%
$90 19.10% 14.89% 10.00% 10.96%
 IRR Comparison

20.00%

15.00%

10.00%

5.00%

0.00%
$20 $30 $40 $50 $60 $70 $80 $

-5.00%

-10.00%
son

Common Stock

Regular
Convertible

Reverse
Convertible

$70 $80 $90

Mandatory
Convertible
 Final IRR Comparison -- Lo

Initial Investment 100

Initial share spot price 40
Number of shares purchased 2.5
Tenor of investment in years 5
Coupon on regular convertible in USD 3
Dividend on common shares in USD 2
Coupon on reverse convertible in USD 10
Dividend on preferred shares in USD 7.75
mparison -- Low Prices

IRR

Final Stock Common Regular Reverse Mandatory

Price Stock Convertible Convertible Convertible
$2 -37.08% -6.02% -15.70% -21.15% 4.00%
$4 -31.19% -3.43% -12.65% -17.99%
$6 -26.89% -1.09% -10.04% -15.31% 2.00%

$8 -23.45% 1.04% -7.74% -12.97%

$10 -20.55% 3.00% -5.68% -10.89% 0.00%
$2
$12 -18.04% 3.00% -3.81% -9.01%
-2.00%
$14 -15.81% 3.00% -2.10% -7.29%
$16 -13.80% 3.00% -0.51% -5.70%
$18 -11.97% 3.00% 0.98% -4.22% -4.00%

$20 -10.28% 3.00% 2.37% -2.83%

$22 -8.71% 3.00% 3.68% -1.53% -6.00%
$24 -7.25% 3.00% 4.93% -0.30%
$26 -5.87% 3.00% 6.11% 0.87% -8.00%
$28 -4.57% 3.00% 7.23% 1.98%
$30 -3.35% 3.00% 8.31% 3.05% -10.00%
$32 -2.18% 3.00% 9.34% 4.06%
$34 -1.06% 3.00% 10.00% 5.04%
$36 0.00% 3.00% 10.00% 5.98%
$38 1.02% 3.00% 10.00% 6.88%
$40 2.00% 3.00% 10.00% 7.75%
$42 2.94% 3.00% 10.00% 8.59%
$44 3.85% 3.00% 10.00% 9.41%
$46 4.73% 3.00% 10.00% 10.20%
$48 5.58% 3.00% 10.00% 10.96%
$50 6.40% 3.00% 10.00% 10.96%
$52 7.20% 3.74% 10.00% 10.96%
$54 7.97% 4.46% 10.00% 10.96%
$56 8.72% 5.16% 10.00% 10.96%
$58 9.45% 5.85% 10.00% 10.96%
$60 10.16% 6.51% 10.00% 10.96%
$62 10.86% 7.16% 10.00% 10.96%
$64 11.53% 7.79% 10.00% 10.96%
$66 12.19% 8.41% 10.00% 10.96%
$68 12.84% 9.01% 10.00% 10.96%
$70 13.47% 9.60% 10.00% 10.96%
$72 14.08% 10.18% 10.00% 10.96%
$74 14.69% 10.75% 10.00% 10.96%
$76 15.28% 11.30% 10.00% 10.96%
$78 15.85% 11.84% 10.00% 10.96%
$80 16.42% 12.37% 10.00% 10.96%
$82 16.98% 12.90% 10.00% 10.96%
$84 17.52% 13.41% 10.00% 10.96%
$86 18.06% 13.91% 10.00% 10.96%
$88 18.58% 14.41% 10.00% 10.96%
$90 19.10% 14.89% 10.00% 10.96%
 IRR Comparison

4.00%

2.00%

0.00%
$2 $7 $12 $17 $22 $27

-2.00%

-4.00%

-6.00%

-8.00%

-10.00%
arison

$22 $27
Common Stock

Regular Convert-
ible

Reverse Convert-
ible

Mandatory
Convertible
 Solution to Question 1

Call
Inputs Strike Option
$50 $8.17
Risk-free rate 4.50%
Credit spread 2.00%
Coupon 3.00%
RFR (CC) 4.40%
Spot 40
Vol 30%
Tenor 5.00
Div. yield 2.00%

Value of the "pure" bond $85.46

Total value of convertible $101.80

 Solution to Question 2 (1)

Call
Inputs Strike Option
$50 $6.97
Risk-free rate 5.00%
Credit spread 2.00%
Coupon 5.02%
RFR (CC) 4.88%
Spot 40
Vol 20%
Tenor 10.00
Div. yield 3.00%

Value of the "pure" bond $86.09

Total value of convertible $100.00

 Solution to Question 2 (2)

Final
Stock Stocks
Price
Initial Investment 100 $20 -2.62%
Initial share spot price 40 $22 -1.90%
Number of shares purchased 2.5 $24 -1.23%
Tenor of investment in years 10 $26 -0.59%
Coupon on convertible in USD 5.02 $28 0.00%
Dividend on shares in USD 3 $30 0.56%
$32 1.10%
$34 1.61%
$36 2.09%
$38 2.55%
$40 3.00%
$42 3.43%
$44 3.84%
$46 4.24%
$48 4.62%
$50 4.99%
$52 5.35%
$54 5.69%
$56 6.03%
$58 6.36%
$60 6.67%
$62 6.98%
$64 7.28%
$66 7.58%
$68 7.86%
$70 8.14%
$72 8.41%
$74 8.68%
$76 8.94%
$78 9.19%
$80 9.44%
$82 9.69%
$84 9.93%
$86 10.16%
$88 10.39%
$90 10.61%
tion 2 (2)

IRR
Convertible
Straight
Convertible Underperforms
Debt
Both?
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.02% NO
7.00% 5.33% YES
7.00% 5.64% YES
7.00% 5.93% YES
7.00% 6.22% YES
7.00% 6.50% YES
7.00% 6.78% YES
7.00% 7.04% NO
7.00% 7.30% NO
7.00% 7.56% NO
7.00% 7.81% NO
7.00% 8.05% NO
7.00% 8.29% NO
7.00% 8.52% NO
7.00% 8.75% NO
7.00% 8.97% NO
7.00% 9.19% NO
7.00% 9.41% NO
7.00% 9.62% NO
7.00% 9.83% NO
7.00% 10.03% NO
 Solution to Question 3

Call
Inputs Strike Option
$50 $6.89
Risk-free rate 5.00%
Credit spread 5.00%
Coupon 6.37%
RFR (CC) 4.88%
Spot 40
Vol 25%
Tenor 5.00
Div. yield 2.00%

Value of the "pure" bond $86.23

Total value of convertible $100.00

 Solution to Question 4

Initial investment 1,000

Initial share spot price 40

Tenor of investment in years 3
Dividend on preferred shares in USD 55
n4

Final Stock Mandatory

Price Convertible
$20 -13.67% 20.00%
$22 -11.34%
$24 -9.13% 15.00%

$26 -7.03%
10.00%
$28 -5.02%
$30 -3.10% 5.00%
$32 -1.25%
$34 0.53% 0.00%
$25 $30 $35 $40
$36 2.24%
-5.00%
$38 3.90%
$40 5.50% -10.00%
$42 7.05%
$44 8.56%
$46 10.03%
$48 11.46%
$50 11.46%
$52 11.46%
$54 11.46%
$56 11.46%
$58 11.46%
$60 11.46%
$62 12.57%
$64 13.67%
$66 14.74%
$68 15.79%
$70 16.82%
$72 17.84%
$74 18.83%
$76 19.81%
$78 20.77%
$80 21.72%
$82 22.65%
$84 23.57%
$86 24.48%
$88 25.37%
$90 26.25%
 IRR

$35 $40 $45 $50 $55 $60 $65 $70

$65 $70