Chapter 6 Chapter 6

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Interest rate for 3 months = 27/973 = 0.02775 = 2.775%
Effective annual interest rate =
100(1.02775) (1.02775) (1.02775) (1.02775) – 100 = 11.57%
(b) Effective annual interest rate = 100(1.05)(1.05) -100 = 10.25%
Q. . N0.44 Daau ji Ltd issues 1m convertible debentures of Rs.100 each, maturity
10 years, annual coupon rate 10%. The debentures can be converted into 5 equity
shares of the company at any time after the expiry of one year. Currently, the
shares are quoted in the market at Rs.18 with PE ratio of 10; this ratio is likely
to be maintained for years to come. The EPS of the company is expected to
grow 10% p.a.
The company can call back the debentures following the international norms
which are as follows:
“It is customary in most issues today, that the bonds should not be ‘callable’
for three years from the date of issue after which they will only be callable if
issuer’s share price has risen over the conversion price, say by 30 per cent
(or more) and has remained above such a level for a minimum period of time
(normally 30 consecutive trading days).”
The company follows a policy of calling the debentures only in the beginning
of the year. After how many years the debentures can be called back
Answer :
Conversion price is Rs.20. The debentures can be called if the share price
reaches Rs.26 and remain at that level for 30 consecutive trading days.
Suppose today is 1.1.2008.
Date
Market price
1.1.2009 19.80
1.1.2010 21.78
1.1.2011 23.958
1.1.2012 26.3538
Assumption : 30 trading days are there in 6 weeks time.
Increase in price per week in 2011 = [ 26.3538-23.958 ] /52 = 0.04507
Increase in 46 weeks = 2.11936
Price on completion of 46 weeks of 2011 = 23.958 + 2.11936 = 26.07
It means during the last 6 weeks of 2011, the price in the market will be above
Rs.26.
The debentures can be called on 1.1.2012 i.e. the debentures can be called after
4 years of the issue.