Convertible bond price floor minimum, because, 215, conversion, 220

dvilayphet

In the context of the convertible bonds section, Schweser text pg 215 book 4 says, "the minimum value of a convertible bond must be the greater of its conversion value or straight value."

On page 220, it says, "when the stock’s price falls, the returns on convertible bonds exceed those of the stock, because the convertible bond’s price has a floor equal to its straight bond value."

So, since in the first sentence they say that min value is lesser of CV or SV, shouldn't the second sentence say "has a price floor equal to the greater of its straight bond value or conversion value" rather than just saying that the price floor is equal to straight value.

benbenxiong

yes you are understanding my point of confusion exactly right.

honestly not seeing thedifference still between minimum value and price floor.

min value is lowest value a convertible bond can be but price floor is the true, straight vlaue of the bond (without any optionality)?

kkn006

what i find with schweser is that often, they present the theory correctly in the 1st place and then go on to apply it correctly.

they will then add a supplementary comment that is NOT generally true and only true in the case of the paragraph/example.

this may be an example of that

Swanand

so which is the untrue statement here

Uranus08

Basically Minimum value is the greater of CV or SV okay? which actually is the value of the convertible bond. This does mean there is a floor where value of convertible bond can not fall below the SV but the relation it has with return is different.

Whereas the return on convertible bond is negative when stock price falls but it this negative return is SMALLER than the negative return you would have gotten by investing directly only in stock (and not in convertible bond) BECAUSE a convertible bond aside from giving you stock return is also give you coupon payments on the bond. Get it?

chandsingh

yea got all that, my only point of confusion is why they are saying that the price floor is the straight value since its possible that the conversaion value could be greater and thus, it isthe conversaion value rather thanstraight value that could serveas the pricefloor