From: dbk@pslu1.psl.wisc.edu (Don Katz)
Subject: Re: Convertible Bonds (One more time!)
Organization: Physical Sciences Lab, University of Wisconsin
Date: Tue, 1 Sep 92 16:51:35 GMT

In article <BtwMo4.3pv@encore.com> rcollins@encore.com (Roger Collins) writes:
>No one responded to my request for info. on convertible bonds,
>so let me be more specific and challenge you by saying, does anyone
>know anything?

No.

But let's take an example, SCISH, SCI Systems, 7s2015, currently
selling for 101.5 asked. (7s2015 means that it pays 7% or $70/yr on a
$1000 bond, and it matures in 2015).

The price is the percent of the face value of the bond, so that for a
$1000 face value bond, the current cost would be $1015 + commission.

>
>What do these fields mean:
>
>Current Yield,

$70/$1015 = 6.9%

>
>Yield to Maturity,

Compounded yield from now to maturity. I don't have a real calculator
here, so I can't give you the value. For premium bonds (price greater
than 100) it will be less than current yield, discount bonds (price
less than 100) have a yield to maturity greater than current yield.

Not very useful for convertibles unless they are busted (i.e. unless
the stock price is far below the conversion price) since converibles
are not purchased in the expectation of holding to maturity. Usually
they are called when the price is well above par due to stock price
appreciation, and holders convert into stock.

>
>Bond Close (seems to be around 100 usually, do you multiply
>by 10 to get the price of a $1000 bond?  Are all these bonds
>$1000 when issued?)

Almost always $1000 when issued. Zero coupon converts are issued a
large discount to par (since all of their yield is internally
compounded, and never seen by the purchaser till maturity). I have
seen some new converts recently issued at a slight discount to par,
I'm not sure why. 

>
>Conversion Price (How does conversion work?  Is $1000 for
>each bond converted to stock at the conversion price?)

Yes. So the number of shares received per bond is $1000/conversion
price. 

>
>Lastly, % Premium

Current price of bond / (number of shares per bond X stock price) - 1

or

you can look at the current stock price X % premium as the amount you
are paying for each share of stock that you will receive if the
convertible is called and you convert.

>
>OK, give us your best shot and educate us on convertible bonds.
>Please.  Opinions and experience on these things are welcome,
>too.

Value Line Convertibles newsletter has an inexpensive trial
subscription which comes with lots of useful info. There is also a
book that I read called Convertibles (small hardback, bought at a
trade bookstore) that gave me a basic understanding of convertible
valuation. 

Convertibles are part bond, part stock, and can be valued either way.
In addition to looking at the % premium over the stock price, you can
look at the % premium over the bond value. Because of their bond
value, they have less downside risk than stock. They also have better
standing in case of bankruptcy. Like bonds, they are sensitive to
interest rates, but the long-term increase in the converts price due
to stock price increase may help here. 

Don Katz
dbk@psl.wisc.edu




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