Originally Posted by
Fox
Following on from my prior analysis of the bonds and what research Roger has done, I've found some time to give my opinion on the value of these beauties using the Black Scholes pricing model. Basically within a convertible bond you have a straight bond and a callable option which can be valued using your preferred option pricing model. The only tricky part with valuing convertible bonds are the different terms to which they get converted at - for this case its the lesser of $3.75 or a 5% discount to the 90-day VWAP, and the assumptions we use in discounting the bond's cash flows and valuing the option.
My assumptions are the following:
- TNR standard deviation - 7.94%
- Div. yield - 3.31%
- Risk free rate (taken from RBNZ) - 2.48%
- Default spread - 3.00% (Giving us a YTM of 5.48% on the straight bonds)
The current derived value of the callable option per bond turns out to be $0.060, with the value of the straight bond being $1.016 (ignoring the 9 days of accrued interest), giving us a current bond price of $1.076.
Important things to note; this value was assuming a current share price of $3.62, so as at today we use the 5% discount to the share price model. Also the risk free rate and default spread have the most significant effects on the valuation outcome, so adjust accordingly to what you think is best.