CIMA F2 Syllabus A. Financing capital projects - Convertible Debt - Notes ^{6 / 7}

Here the investor has the choice to either be paid in cash or take shares from the company.

Hence, the debt is convertible into shares.

Convertible debt has a lower interest rate than normal debt.

You have to split the Value into:

1. Debt

   This is Present Value of Future Cash Flows

2. Equity

   This is usually a balancing figure

Illustration

AB issued a $4 million 7% convertible bond on 1 January 20X3 at its nominal value.
 
The present value of the principal and interest cash flows associated with the bond is $3,689,000 using 9% as a discount rate. 

The value that will be credited to equity on the issue of this instrument (to the nearest $’000) is:

• Solution

  4,000 - 3,689 = 311