Convertible bonds are a type of financial instrument that com

They are a form of corporate debt security, typically issued by

Bond Component: Convertible bonds are initially issued as tra

(the principal amount), a stated interest rate (coupon), and a
and at maturity, they are entitled to receive the face value of

Conversion Feature: What sets convertible bonds apart is the

bond holdings into a predetermined number of common sha
The conversion ratio defines the number of shares that can b

Flexibility: Bondholders have the choice to convert their bond

This flexibility makes convertible bonds more attractive to inv
Equity Participation: When bondholders choose to convert, th
This provides potential for capital appreciation and dividends

Yield and Risk: Convertible bonds usually offer a lower yield (

since they provide the potential for capital gains through con
They are considered a hybrid security, offering a mix of inco

Issuer Benefits: Companies issue convertible bonds as a way t

for non-convertible bonds, as the conversion feature makes t

Convertible bonds are attractive to investors seeking a balance

as they combine income potential with the opportunity for ca
is influenced not only by changes in interest rates and creditw
This makes them a complex investment option that requires c
nstrument that combines features of both bonds and stocks.
y, typically issued by a company to raise capital, and they have the following

nitially issued as traditional bonds, which means they have a fixed face value
ate (coupon), and a maturity date. Bondholders receive periodic interest pay
ve the face value of the bond.

e bonds apart is their conversion feature, which allows bondholders to conve

ber of common shares of the issuing company.
of shares that can be acquired per bond, and it is specified in the bond's term

o convert their bonds into shares at their discretion, typically at any time befo
ore attractive to investors who believe the company's stock price will rise.
hoose to convert, they become shareholders in the company, giving them an
ation and dividends, but it also exposes them to the risks and volatility of th

offer a lower yield (interest rate) compared to traditional corporate bonds

l gains through conversion.
ffering a mix of income from interest and the opportunity for equity upside.

ble bonds as a way to raise capital at a lower interest rate than they might hav
on feature makes them more attractive to investors.

rs seeking a balance between fixed-income securities and equities,

e opportunity for capital appreciation. However, the value of convertible bon
st rates and creditworthiness but also by the price movements of the underl
ption that requires careful evaluation of both the issuer's credit quality and t
have the following key characteristics:

ve a fixed face value

periodic interest payments,

ondholders to convert their

d in the bond's terms.

ally at any time before the bond matures.

ock price will rise.
any, giving them an ownership stake.
and volatility of the stock market.

corporate bonds

for equity upside.

than they might have to pay

equities,
e of convertible bonds
ments of the underlying common stock.
credit quality and the outlook for the company's stock.
Convertible bonds come in various types, each with its

Straight Convertible Bonds: These are the most basic

and the option for bondholders to convert their bonds
There are no additional features or conditions attached

Mandatory Convertible Bonds: These bonds have a pre

to convert their bonds into a specified number of comm
. The conversion is mandatory and not at the discretion

Reverse Convertible Bonds: These bonds are structure

compared to traditional bonds but with the condition th
instead of receiving their principal back at maturity. This

Contingent Convertible Bonds (CoCos): Contingent con

be written down (partially or fully) based on specific trig
CoCos are primarily used by financial institutions to me
Extendible Convertible Bonds: These bonds offer bondh
maturity date of the maturity in exchange for the poten
bond for a specific period, usually at a fixed interest rat

Exchangeable Bonds: These bonds are similar to conver

– they can be exchanged for the common shares of a diff
usually a subsidiary or a company in which the issuer ho

Callable Convertible Bonds: Callable convertible bonds

the bonds at a predetermined price before maturity.
This feature can be a disadvantage for bondholders beca
if the issuer calls the bonds, bondholders may not have

Puttable Convertible Bonds: Puttable convertible bonds

back to the issuer at a predetermined price.
This feature provides some protection to bondholders i

Zero-Coupon Convertible Bonds: These bonds do not pay

They offer the potential for capital appreciation through
the difference between the purchase price and the valu
pes, each with its unique characteristics and terms. Some common t

re the most basic type of convertible bonds. They offer a fixed interes
nvert their bonds into common shares of the issuing company.
nditions attached to these bonds.

bonds have a predetermined conversion feature that requires bondh

number of common shares at a certain future date, usually upon mat
at the discretion of the bondholder.

onds are structured in a way that provides investors with the opportu
h the condition that they may be forced to take shares of the issuing c
k at maturity. This type of bond carries more risk compared to standa

): Contingent convertible bonds are a type of hybrid security that can

sed on specific trigger events, such as the issuer's financial distress.
nstitutions to meet regulatory capital requirements.
bonds offer bondholders the option to extend the
nge for the potential for greater capital appreciation.
fixed interest rate. Investors may choose to extend the bond's

similar to convertible bonds but have a distinct feature

mon shares of a different company,
hich the issuer holds a significant ownership stake.

onvertible bonds give the issuer the right to call (redeem)

fore maturity.
bondholders because
ers may not have the opportunity to benefit from potential stock pric

convertible bonds allow bondholders to put (sell) the bonds

n to bondholders in case the issuer's financial health deteriorates.

onds do not pay regular interest (coupons) but are issued at a de

preciation through conversion, but the investor's return primarily com
price and the value of the common shares received upon conversion.
. Some common types of convertible bonds include:

ffer a fixed interest rate, a maturity date,

company.

at requires bondholders
usually upon maturity

with the opportunity to receive a higher interest rate

res of the issuing company
mpared to standard convertible bonds.

d security that can convert into common shares or

nancial distress.
 the bond's

deem)

otential stock price appreciation.

e bonds

deteriorates.

re issued at a deep discount to their face value.

turn primarily comes from
upon conversion.
Conversion Ratio ?

The conversion ratio is the number of common shares th

each convertible security such as a convertible bond .
The higher the ratio, the more common shares exchang
The conversion ratio is calculated by dividing the conve

For example, if a convertible bond has a par value of $10

then the conversion ratio would be 20:1.
This means that one bond can be converted into 20 sha

Conversion Value
The conversion value is the financial worth of the securi
It is calculated by multiplying the conversion ratio (how
The conversion value is useful in determining break-eve

For instance, if a convertible bond has a conversion ratio

then the conversion value would be $1000. This means
would receive $1000 worth of common stock if they con
Conversion Premium

The **conversion premium** is the amount by which t

current market value of the common stock into which
The conversion premium is the excess of the bond valu
value of the bond.
It is expressed as a dollar amount and represents the diff
conversion or straight bond value . The reason for the p
will own a greater value in equity shares than previously
The conversion premium is a key component of computi
Convertible arbitrage strategies are used by some trade

Conversion Premium Formula

Conversion premium is the comparison between curren

Conversion Premium = Market Price (convertible securit

Market price: is the market value of the debt security

Conversion Price: is the market value of converted secur

Conversion price = Conversion ratio x current market pr

Conversion Premium Example

Company issue 8% convertible bond with par value of
It means one bond will be able to exchange to five co
At the end of 2nd year, the bonds market price is $ 1,

Calculate the conversion premium of the convertible b

Conversion Premium = Bonds Market Price – Conversi
=$ 1,100 – ($ 5 share x $ 210 per share) = $ 50 per sha
The conversion price is $ 1,050 which is the amount t

The conversion price is $ 1,050 which is the amount t

Downside risk in a convertible Bond

The downside risk in a convertible bond is the possibility

below the conversion price, or if the issuer defaults on t
The downside risk can be measured by the difference be

For example, suppose a convertible bond has a market p

The current market price of the common stock is $50 pe
The downside risk would be $200 ($1200 - $1000), whic
if they convert the bond into stock at the current marke

The downside risk can be reduced by choosing convertib

higher coupon rates, or shorter maturities . Alternative
by selling short the underlying stock or buying put op

Declining Stock Price: Let's say an investor holds a conv

a 5% coupon rate, and a conversion ratio of 10.
The current market price of the company's stock is $50
The bondholder initially invested $1,000 in the bond,
which provides an annual interest payment of $50 (5%
the convertible bond's conversion value would be $400
At this point, the bondholder may choose not to conver
but the market value of the convertible bond will have
This represents a downside risk as the bond's market va
Note : Conversion ratio 25
common shares that an investor receives at the time of conversion for
nvertible bond .
n shares exchanged per convertible security
dividing the convertible security’s par value by the conversion price of

a par value of $1000 and a conversion price of $50 per share,

erted into 20 shares of common stock

orth of the securities obtained by exchanging a convertible security fo

ersion ratio (how many shares received per bond) by the market price
rmining break-even or floor values involved with holding convertible s

a conversion ratio of 20:1 and the market price of the common stock
1000. This means that an investor 20*50
n stock if they convert one bond
 mount by which the price of a convertible security exceeds the
stock into which it may be converted
s of the bond value over the conversion

represents the difference between the price of the convertible and th

e reason for the premium is that once converted, the investor
es than previously owned in bonds .
ponent of computing a convertible's payback period .
sed by some traders to take advantage of excess conversion premium

n between current price of debt (bonds) and conversion price.

onvertible security) – Conversion Price (value)

e debt security

of converted security (equity)

current market price

Example
 with par value of $ 1,000. The bond will be converted to common s
change to five common stocks on the maturity date.
rket price is $ 1,100 while the market price of commons stock is $

the convertible bond.

Price – Conversion price
re) = $ 50 per share
h is the amount that investors going to receive if they convert the

h is the amount that investors going to receive if they convert the

d is the possibility that the bondholder will lose money if the price of
suer defaults on the bond payments .
y the difference between the market price of the bond and the conver

ond has a market price of $1200, a conversion ratio of 20:1, and a cou
on stock is $50 per share. The conversion value would be $1000 (20 s
00 - $1000), which means that the bondholder would lose $200
he current market price .

choosing convertible bonds with lower conversion premiums,

rities . Alternatively, the bondholder can hedge their position
or buying put options on the stock .

estor holds a convertible bond issued by Company XYZ with a $1,000 f

tio of 10.
any's stock is $50 per share.
00 in the bond,
yment of $50 (5% of the face value). If the stock price of Company XYZ
ue would be $400 (10 shares x $40 per share).
ose not to convert and instead receive the $50 annual interest payme
le bond will have decreased to $450 ($400 conversion value + $50 ann
bond's market value has fallen.
of conversion for

onversion price of equity

per share,

vertible security for its underlying assets

y the market price of the common stock
ding convertible securities

he common stock is $50 per share,

 exceeds the

convertible and the greater of the

he investor

nversion premiums in the market .

sion price.
 ted to common stock on the maturity date at rate of 5:1

mmons stock is $ 210 per share.

they convert the bonds into the equity security.

they convert the bonds into the equity security

ney if the price of the underlying stock falls

nd and the conversion value of the stock .

of 20:1, and a coupon rate of 5%.

uld be $1000 (20 shares * $50 per share).
ld lose $200

remiums,
 position

YZ with a $1,000 face value,

e of Company XYZ falls to $40 per share,

ual interest payment,

on value + $50 annual interest).
of 5:1
Example 1:
ABC Co has issued 100,000 units of convertible bonds w
The coupon rate of the bonds is 10% payable annually
The bonds are convertible into ordinary shares at a conv
The current market price of the shares is $60 per share.
Calculate the conversion ratio, conversion value, and co

Solution:
The conversion ratio is calculated as follows:
Conversion Ratio = Par Value / Conversion Price
= $100 / $50
=2

The conversion value is calculated as follows:

Conversion Value = Current Market Price x Conversion
= $60 x 2
= $120

The conversion premium is calculated as follows:

Conversion Premium = Market Price - Conversion Value
= $100 - $120
= -$20
Since the conversion premium is negative, this means th

Example 2:

A technology company issued $100 million in convertib

The last date of conversion is 31 December 20Y0. The b
Three bonds can be converted to 50 shares of common s

It is 1 January 20X8 and the bonds currently trade at $1,3

Find out the bond’s conversion ratio, conversion price, c

Solution
Conversion Ratio = 16.666667

Conversion Price = 60=1000/E39

Current share price of the stock given

Conversion Value = 16.6667 × 75.50 = $1,258.33

The price of the bond as if it is a plain-vanilla bond can b

Straigh value of the bond ==> calculated using the given
The conversion value ($1,258.33) is higher than the str
Conversion Premium = $1,325 – $1,258.33 = $66.67

The conversion premium reflects the potential of furthe

Example 3:
ABC PLC has issued a convertible bond successfully.
The terms of the bond are as follows. Par value of each
Conversion ratio 50 Conversion premium 100% What is

Bond par value 100

Conversion ratio 50
Conversion premium 100%

Convrsion price 2
Since converion premium is 100%, 2 represents 100% ov
the price at issue must be 1

Example 4:
Convertible PLC has been advised that it can issue 10-ye
Instead, the company could issue a comparable maturit
Assuming that this advice is correct, what is the value of
Given
Assume face value / Par value 100
Term 10
Coupon Rate 6.50%
Yield Market 6.50%
Price ₹100.00
Difference between Par and this value

Example 5:

On Sep 2003, Primus Telecom issued the following conv

Size 110
Term 7
Redemption Date 9/15/2010
Nominal Value par value 1000
Interest Coupon 3.75%
Conversion Price 9.3234
Conversion ratio 107.257
market Price at issuance 100
Bloomberg Ticker 3.75%

Conversion Ratio Nominal Value / C

Conversion Price 9.3234008
Conversion Value 999.99991

Bond Price and Market price of the share will vary at diff
Bond price will vary depends on Yields, Market price of t
Higher the market price of the share, will result in highe

Example 6:
Johnson Inc bonds have a $1000 per value. The bonds h
price of $50 per share.
Johnson Inc common stock closed today at $52 per shar
Calculate the conversion value of the convertible bonds

Conversion Ratio
Current Price
Conversion value
Example 7:
Davenport Docks has $10mn of $1000 per value converti
The bonds carry 6% coupon rate.
The bond indenture states that the bond holder may ex
As of closing today, the conversion value of the bonds is
Calculate conversion price and market price of the stock
Given
Par value of the bond 1000
Conversion Ratio 25
Conversion price 40

CMP of the bond 1150

Market Price 46
Conversion value Price / Conversion
46

Example 8:

Given
Bond par value 1000
Coupon Rate 10%annual
Term 10
CMP 850
Convertible ratio 50
CMP of share 17
Yield 11.80%

Step 1
Calculate Yield of the bond 12.735%
Similar Bond yield 11.80%
Yield Spread 0.935%

Example 9:

The following is the data related to 9% Fully convertible

issued by Delta Ltd. at ` 1000.
Market Price of 9% Debenture 1000
Conversion Ratio (No. of shares) 25
Straight Value of 9% Debentures 800
Market price of equity share on the date of conversion
Expected Dividend per share RS 1
Calculate:
i. Conversion value of Debenture;
ii. Market Conversion Price;
iii. Conversion Premium per share;
iv. Ratio of Conversion Premium;
v. Premium over straight Value of Debenture;
vi. Favourable Income Differential per share; and
vii. Premium pay back period

(i) Conversion Value of Debenture

(ii) Market Conversion Price

(iii) Conversion Premium Market Conversio

10
(iv) Ratio of convesion premium

(v)
Premium over straight value of the debenture

(vi) Favourable income differential per share

Coupon Interest from Debenture- Conversion Ratio *

Coupon amount 90
Conversion Ratio 25
Dividend 1

Favourable income from debenture

(vi) Premium pay back

Conversion Premium per share / Favourable income diff

Example 10

The following information relates to a convertible bond

Issue date 7/1/2020

Maturity date 7/1/2024
Coupon rate 5%
Issue size 1,000,000
Issue Price 100
Conversion ratio 2.58

Calculate the Conversion price

Conversion Ratio 2.58given

Conversion Price 38.7597

Example 11
A company issues a convertible bond at $800 with a face
The bond can be converted to 15 common shares, which
Calculate the Conversion price

Conversion Ratio = Issue price / Conversion Price

A convertible bond has a straight bond value of $1,050.

What is the value of the option to convert?
What is the intrinsic value of a call and a put, each with
if the stock price is currently $50? What if the stock pric

Straight value of the bond 1050

Conversion ratio 24
stock price 49
Conversion value 1176
Value of the option to convert 126

The intrinsic value of an option is the pay off from the option if the option is exercis

call option payoff = max(0, stock price - strike price)

put option payoff = max(0, strike price - stock price)

Strike price : 40 given

CMP price : observable

Applying the formula, the intrinsic value if the stock is is 50 is:

intrinsic value of call = max(0, 50 - 40) = 10
intrinsic value of put = max(0, 40 - 50) = 0 0
If the stock price is 20, the intrinsic value is:

intrinsic value of call = max(0, 20 - 40) = 0

intrinsic value of put = max(0, 40 - 20) = 20

tible bonds with a nominal value of US$100 each.
e annually
res at a conversion price of $50 per share.
0 per share.
value, and conversion premium.

Conversion Ratio

version Value
his means that the bond is trading at a discount to its conversion value.

in convertible bonds on 1 January 20X1 with a maturity date of 31 De

20Y0. The bonds have $1,000 par value and coupon rate of 6% compo
of common stock. The current market interest rate is 5%.

y trade at $1,325 when the current share price of the stock is $75.50 per

sion price, conversion value and conversion premium.

=50/3 1 Bond is converted in to 16.6 shares

0/E39 par value of the bond / conversion ratio

75.5
1258.33 Conversion value = Conversion Ratio *

a bond can be worked out using Excel PRICE function which equals $1
ng the given date without conversion option or stated value of a com
than the straight-bond value ($1,065.28), so conversion premium eq
= $66.67 Bond value at the marke : 1325.00

tial of further stock price increase which before the conversion date.

essfully.
alue of each bond £100
00% What is ABC’s share price at issue?

ents 100% over share price at issue

n issue 10-year straight debt at a yield of 6.5% (annual).

able maturity convertible bond at par with a coupon of 4.5% (annual)
the value of the conversion option implied?
 100
Years 10
4.50%
6.50%
₹85.62
₹14.38

llowing convertible bond.

mn
Years

inal Value / Conversion rate 107.257

ill vary at different periods post issuance.
ket price of the share .
sult in higher premium for convertible

The bonds have 5.5% annual coupon and carry a conversion

$52 per share.

rtible bonds.

20
52
1040

alue convertible bonds outstanding.

older may exchange the bonds for 25 shares of common stock.

the bonds is $1150
e of the stock
/ Conversion Ratio
convertible (into Equity Shares) debentures

conversion 30
 Market Price of one share * Conversion Ratio
750
40

et Conversion Price- Market price of one share

0.33333

Market Price of the convertible bond / Straight value of

25%

ion Ratio * Dividend Per Share/ Conversion Ratio

2.6
 3.8462

e income differential per share

ertible bond issued by XYZ inc.

conversion price

00 with a face value of $1,000, which pays 6% annual coupons.

shares, which are traded at per share. The market price of the converti
 66.6667 (1000/15)

e of $1,050. The conversion ratio is 24, and the stock price is $49 per

ut, each with an exercise price of $40,

he stock price is $20?

he option is exercised right now, at the current market price. The payoff from call and put options are a
conversion value.

rity date of 31 December 20Y5.

rate of 6% compounded semiannually.

tock is $75.50 per share.

cmp 75.5
shares conversion ratio 16.667
conversion price

onversion Ratio * Current Share price of the stock

n which equals $1,065.28. Straight value of the bond

ed value of a comparable bond
sion premium equals $66.67
 66.67

conversion date.

of 4.5% (annual).
t 10
yield 6.50%
cr 4.50%
 version

mon stock.
Straight value of the bond -1
 coupons.
ice of the convertible bond is $700.
 price is $49 per share.

call and put options are as follows:

conversion ratio 2
conversiob value 120
conversion pre 100-120
 bonds value 1325

the bond
Illustration

You are analyzing a convertible bond. The characteristics of the bond a

Given
Par value of the bond 100
Annual Coupon Rate 5%
Conversion ratio 2.58
Market Price of the bond 110%of par value
Straight value of the bond 90%of par value

Value of the underlying stock characteristics

Current market price 35
Annual Cash dividend 2.2per sahre

Calculate
Converion Value
Minimum value of the convertible bond
market Conversion price
Market conversion premium per share
Market conversion premium ratio
(i) Conversion Value Underlying Share price * Conversi

(ii) Minimum value the convertible bond

(iii) Market conversion price Convertible bond p

(iv) Market conversion premium Market conversion

(v) Market conversion premium ratio

cteristics of the bond and the underlying common stock are given below:

f par value
f par value

ristics

er sahre
 e price * Conversion Ratio 90.3=F14*F9

max(conversion value, Straight value of the bond)

90.3=MAX(L25,F11*F7)
onvertible bond price / conversion ratio 42.636=(F10*F7)/F9

Market conversion price- Underlying Share price 7.6357

Market Conversion premium per share / Underlying share price

21.816%=N31/F14
 1

of the bond) 2

(F10*F7)/F9 3
4
=M29-F14

ng share price
conversion value 90.3

min value of convertible bond 90.3

market conversion price 42.636

market conversion premium 7.6357

21.816
Downside Risk and Upside Potential of Convertible Bonds

Downside risk

The value of a straight bond can be used as a benchmark of the downs

Premium over straight value=(Bond price/ S

The higher the premium over straight value, the less attractive the conv
However, this measure is not accurate as the straight va

Example: Calculating Premium over Straight Value

Consider a convertible bond with a market price of $110 and a straight

The issuing company’s stock is currently $35 per share. The bond’s pr
Premium over straight value=Convertible bond priceStraight value−1

Convertible bond Market Price

Straight Value of the bond
Premium over straight value
Example
Consider a convertible bond that pays 10% annual coup
and maturing on 31/12/2020.

The bond's characteristics and market information are a

Issue date 1/1/2018

Maturity date ###
Annual Coupon 10%
Issue size 100,000
Issue price 1,000
Conversion ratio 25
Straight value 990
Common stock market price 30
Cash dividend annual 2.4

Answer

(i) Market convesion premium per share

Market Conversion Price

Market convesion premium per share
onvertible Bonds

benchmark of the downside risk of a convertible bond. The following metric can thus be

t value=(Bond price/ Straight value)−1

e less attractive the convertible bond is holding all else constant.

te as the straight value varies with changes in the interest rates and c

er Straight Value

e of $110 and a straight value of $90.

per share. The bond’s premium over straight value is closest to:
nd priceStraight value−1=($110/$90)−1=22.2%

110
90
22.222%=(G22-G23)/G23
ys 10% annual coupon issued on 01/01/2018

et information are as follows

per share
per share

Market Conversion Price- Underlying Share pr

Convertible bond price / Conversion ratio

40-30
 metric can thus be computed.

rest rates and credit spreads.

erlying Share price

40
10
Valuing a callable bond = Value of a straight bond -Value

Using Black Schole Option Pricing Model Calculating th

Dividend (annual)
Stock price
Stock Volatility
Face value
Coupon RATe
Risk Free rate
Spread
Yield (Risk free+ spread)
Maturity
Strike Price

Investment Value Price of the bond

Call Equity Value Using Black Schole Option

d1 -0.34236306
d2 -0.811937
N(d1) 0.366038844
N(d2) 0.208413796
PV of K 22.06242256
S * Exp(-yt) 16.82491698
Call 1.560459919

Total Value of Conver ₹1,064.29

Model Input assumptions Value

Current asset Price S0 20.55
Volatility Sigma σ 21%
Risk Free Rate of Int. (cont.
r comp.) 2.50%
Time to Expiration T 5
Strike Price K K 25
Yield Annualized q 4%

Option Parameters for BSM Mode Value

ln(So/K) -0.196014884
(σ^2)/2 + (r-q) 0.705%
((σ^2)/2 + (r-q))* T 0.03525
ln(So/K) + ( (σ^2)/2 + r ) * T -0.160764884
σ* sqrt(T) 0.469574275
d1= ln (So/K)) + ( (r-q) + (σ^2)/2)* T }/ ( -0.342363056
σ* sqrt(T))
d2=d1 - σ* sqrt(T) -0.811937331
N(d1) 0.366038844
N(d2) 0.208413796
Present value of Strike K 22.06242256

Calll Option Price (BSM Model) 1.56

ht bond -Value of Call option

Calculating the Price of the convertible bond

4%
20.55
21%
1000
6%
2.50%
2%
4.50%
5
25

₹1,065.85
Valuing a Convertible Bond Embedded Options

In December 1994, General Signal had convertible bond

following features.
· The bonds matured in June 2002. There were 100,000
outstanding.
· They had a face value of $1000, and were convertible i
June 2002.
· The coupon rate on the bond was set at 5.75%.
· The company was rated A-. Straight bonds of similar ra
yielding 9.00%.
· The stock price in December 1994 was $32.50. The vola
stock prices) based upon historical data was 50.00%.
· There were 47.35 million shares of equity outstanding.
bonds will create 2.532 million additional shares (100,00

Given
Bonds Maturity date
No of shares of convertible bonds outstanding
Face value
Covertible Ratio
Coupon rate
Yield of similar rated bonds
Stock price in Dec 1994
Stock price volatility
No of shares equity outstanding

Conversion Price ( Strike Price)

market price of the Share at inception
RFR
Volatility cc
Time to expiration
Dividend yield on stock

Using Black Schole Option to measure the value of the c

Model Input Value
Index S0 32.50
Strike Price K 39.49
Volatility σ 50%
Risk-free Rate r 7.750%
Term T 7.5
Dividend Yield q 3%
Option Parameters Value
d1 0.8025
d2 (0.5668)
N(d1) 0.7889
N(d2) 0.2854

Call Option Price 14.17

Value of one call 14.17
Value of conversion option 358.76

Value of straight bond ₹825.48

Value of the convertible bond ₹1,184.24

vertible bonds outstanding with the

were 100,000 shares of convertible bonds

e convertible into 25.32 shares per bond until

5.75%.
s of similar rating and similar maturity were

32.50. The volatility (standard deviation in ln

as 50.00%.
y outstanding. Exercising the convertible
shares (100,000 * 25.32 shares).

Jun-02
100,000
1000
25.32Till June 2002
5.75%
9%
32.5
50%
47.35mn

39.494 K
 32.500
7.75%assume as given
50%
7.5years (Dec 1994 to June 2002)
3%

value of the convertible

Value of the straight bond + Value of conversion Option
4 to June 2002)
ersion Option