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lev

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What is a bond floor? What are some of the reasons why you would hold a convertible bond as opposed to holding the underlying stock?
 
Bond floor is the minimum coupon rate the issuer must pay. It benefits the borrower.
 
I think you are referring to "floor". The floor benefits the investor, not an issuer. A bond floor in reference to convertible securities is something else I think. Anyone?



Edited 2 time(s). Last edit at Friday, June 9, 2006 at 04:40PM by lev.
 
By owning a covertible bond, is allows you to earn interest / income as well as participate in the upside of the common share price of the company that issues the bond. When I think of the floor of a bond, I am thinking in terms of duration/ interest rate sensitivty and convexity of the bond. For the owner of the a bond that has a put option; the put acts as a floor on how much the bond price will depreciate in price if interest rates and/ or yileds increase. If the owner / holder of a bond has put that can be put back to the issuer the put option will protect the downside of the bond, because the owner / investor has the ability to put the bond back to the issuer when rates increase. The owner of the bond can then reinvest at the higher market rates that now have become available in the market
 
In other words, when somebody says the converts are trading 10% from bond floor, what does it mean?
 
Oops yeah benefits the investor, not borrower/issuer.

Brain has just turned to mush after the exam :/

Not sure what a bond floor in reference to convertible securities is.



Edited 1 time(s). Last edit at Friday, June 9, 2006 at 04:42PM by Dermot81.
 
Thanks, jbnjc. But that's concerning bonds with put options. What about convertible bonds? Because the investors in converts definitely get to participate in the up-side when stocks rally, it would seem logical that converts will have bond caps, which is similar to callable bonds that exhibit negative convexity as yields fall beyond a certain point. But bond floor?



Edited 1 time(s). Last edit at Friday, June 9, 2006 at 04:47PM by lev.
 
Cap - good for issuer, bad for investor
Floor - good for investor, bad for issuer
Collar - depends
 
I would imagine that in this instance it is not a technical term, but is simply referring to the straight value of the bond. This would be the "floor" value of the convert when the stock price is well below the conversion price. Thus the term "bond floor"

I don't think it has anything to do with an interest rate floor.

The person who would know for sure is ConvertArb.
 
That kinda makes sense. I guess the convert is "busted" when the conversion option is deep out of the money. Thank you.
 
Check out this link, explains valuation of converts. You got it!



http://www.mathworks.com/access/helpdesk/help/toolbox/finfixed/deriv6.html
 
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