1. Analysis and valuation of convertible bonds could fill volumes and actually do [Much has been written about convertible securities. Two volumes, in particular, explore both the basics and the arcana of these instruments. They come from the portfolio managers at Calamos Investments, an investment management firm with a focus on convertible bonds. Calamos, John P. CONVERTIBLE SECURITIES The Latest Instruments, Portfolio Strategies, and Valuation Analysis Revised Edition McGraw-Hill ,1998 and Calamos, Nick P. Convertible Arbitrage: Insights and Techniques for Successful Hedging John Wiley & Sons, Inc. 2003]. For the purpose of the Certified Financial Planner ™ examination, a working knowledge of the basic traits, the mathematics of conversion and their suitability in a client portfolio is sufficient. Evaluation considers several factors, to wit:
    1. Price appreciation required of the underlying common stock of the issuer for conversion to be attractive. The conversion premium ration measures this.
    2. The growth prospects of the underlying common stock.
    3. The bond's downside potential should the underlying common stock's price be so low as to render the conversion privilege worthless.
    4. The yield sacrifice required to purchase the convertible.
    5. The income advantage to acquiring the convertible bond rather than the quantity of shares of the underlying common stock that would be obtained upon conversion.
    6. The quality of the bond and the underlying stock, both of which are, in turn, a function of the quality of the issuer.
    7. The breakeven time which is the number of years over which the premium paid to acquire the convertible will be recovered through what the bondholder expects to be the favorable income differential offered by the convertible bond relative to the underlying common stock.
  2. Formulae: better than committing them to memory alone is an understanding of how and where they figure in the analytical and valuation process. Therefore, a detailed example is provided to bring these concepts together and reinforce them.

    Information on the Globotron Meganet (GMN) 5 ¾ % Convertible Bond Due in 9+ Years and Common Stock
Convertible Bond
Coupon rate 5 ¾ %
Current market price $106.5
Conversion Ratio 25.320 shares of ADC/$1,000 par value
Non-callable for three years
Rating A3/A
Maturity Date 9+ Years

Call Price Schedule
In Year 4 103.59
In Year 5 102.88
In Year 6 102.16
In Year 7 101.44
In Year 8 100.72
In Year 9 100.00
In Year 10 100.00

ADC Common Stock
Expected volatility 17%
Current dividend yield 2.727%
Dividend Per Share $0.90
Stock price $33

Conversion Ratio: the number of shares of common stock that the investor receives from exercising the call option. The ratio may be valid for all or a portion of the bond's life and the ratio itself may change. It is adjusted proportionately for stock splits and stock dividends. ADC Conversion ratio: 25.32 shares

(Stated) Conversion Price: par value/conversion ratio. ADC's conversion price: $1,000/25.32 shares = $39.49

Conversion (parity) Value: conversion value = market price of common stock x conversion ratio. This formula determines the value of the security if immediately converted.


Callable and Foreign Bonds and Promissory Notes

Related Articles
  1. Investing

    Why Include Convertible Securities in Your Portfolio

    What are convertible securities and why you should include them in your portfolio.
  2. Financial Advisor

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).
  3. Financial Advisor

    Is Now the Time for Convertible Bonds?

    Convertible bonds offer a competitive rate of return in what is a very tough market right now. Here's how they work.
  4. Investing

    3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

    Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
  5. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  6. Investing

    Convertible Bonds: Pros And Cons For Companies And Investors

    Find out why businesses choose this type of financing and what effect this has on investors.
  7. Investing

    Leverage Your Returns With A Convertible Hedge

    Find out how you can maintain your income stream by using this type of bond strategy.
  8. Investing

    3 Best High-Yielding Convertible Bond Mutual Funds (LACFX, FACVX)

    LACFX,FACVX,VCVSX: Learn about three of the highest-yielding options available.
  9. Managing Wealth

    The Mandatory Convertible: A "Must Have" For Your Portfolio?

    Mandatory convertibles are a little understood security with some distinct advantages. Find out if they are right for you.
  10. Investing

    CWB: SPDR Barclays Convertible Secs ETF

    Read an in-depth analysis of the SPDR Barclays Capital Convertible Bond ETF, which tracks an index of high-growth potential convertible bonds.
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center