How to Price Convertible Bonds?

Some common momentum indicators include:

• Convertible Security: Debt security that can be converted into a specified number of shares of the issuer's common stock at the option of the security owner.
• Exchangeable Security: Debt security that can be converted into a specified number of common stock shares for a company other than the exchangeable security issuer.

Convertible Bond Analysis Process

• Calculate Conversion Value: which is the current market value of the shares that the bond can be converted into.

• Conversion Value = Market Price per Common Share * Conversion Ratio

• Straight Value: price where the bond would trade if it were not convertible to stock.

• Minimum Value of a Convertible Bond: a convertible bond should, at the lowest, trade at the higher of either the conversion value or straight value.

• Calculate Market Conversion Price: which is the price per share paid when buying the convertible bond and turning it into stock.

• Market Conversion Price = Convertible's Market Price / Conversion Ratio

• Calculate Market Conversion Premium per Share: which is the excess paid per share when the convertible is bought and converted rather than simply buying the common stock.

• Market Conversion Premium per Share =Market Conversion Price - Current Market Price per Share of Stock

• Calculate Market Conversion Premium Ratio: which is the share price mark-up percentage when the convertible is bought and converted rather than simply buying the common stock.

• Market Conversion Premium Ratio = Market Conversion Premium per Share / Current Market Price per Share of Stock

• Calculate the Premium Payback Period: which is the length of years it takes an investor to earn back the conversion premium, given the higher income yield on the bond than the income yield on the stock.

• Premium Payback Period = Market Conversion Premium per Share / Extra Income per Share

• Extra Income per Share = (Bond Coupon Interest - (Conversion Ratio * per Share Dividend)) / Conversion Ratio

• Calculate Premium over Straight Value: this value helps investors interpret downside risk of a convertible bond because the convertible will not trade below its straight bond value.