fixed income: convertible bond: premium payback period income, period, convert, hold

mkytz15

does it mean how long to hold the bond that could compensate the premium paid today to convert to stock? Thanks.

mengxu

nice explanation grumble thanks

ayodayo

no i think it's how long it takes to earn back the premium that you pay for the convertible bond (over the stock)

luda002

-Yeah, it is kind of like you buy the stock indirectly by getting the bond.

Buy a 10% bond for 1000, convertible to 50 shares (1.00 annual dividend). Shares are currently priced at 18.00.

-By doing this you are kind of buying the shares, as you have the option to convert.

If you bought the 50 shares directly, you'd pay 900.00.

So, the total premium you hae paid is 100.00 (1000-900), or 2.00/share.

-So now you want to find out how long it takes for the increased cash flows from buying the bond to offset this premium.

Cashflow from bond = 10% of 1000, or 100.00. That's 2.00/share.
Cashflow from share = 1.00/share, or 50.00/all shares.

Premium payback = premium/cashflow difference = 2.00/(2.00-1.00) = 2 years.