Convertible Debt

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Convertible Debt

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.

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

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