ACCA Applied Skills · Financial Management · The valuation of debt and other financial assets
Orla Co has a convertible bond with $100 nominal value and an 8% coupon, paid annually. It is redeemable at par in 4 years. A similar non-convertible bond would give investors a 10% return. Using discount tables (10%: 4-year annuity factor 3.170; 4-year discount factor 0.683), what is the floor value of the convertible bond?
The floor value is $93.66. It is the present value of the interest and the par redemption discounted at 10%, the return on equivalent straight debt: 8 × 3.170 = 25.36, plus 100 × 0.683 = 68.30.
- A$93.66Correct
- B$100.00
- C$106.34
- D$68.30
Explanation
Floor value is the present value of the bond's cash flows as straight debt at 10%. Interest: 8 × 3.170 = 25.36. Redemption: 100 × 0.683 = 68.30. Total = $93.66. Discounting at the 8% coupon rate would give $100, which is the wrong rate. $68.30 omits the interest.
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