BondCalc: Convertible Bond Predictions
This is the section of BondCalc that graphically values convertible
bonds and preferred stock. For a range of annual stock growth rates the
program will use artificial intelligence to determine when the issue
ends (either by maturity, voluntary conversion, forced conversion or
put). Any converted stock is sold to return the principal, and a zero
spot present value and modified IRR are calculated.
When inputting the various data use F1 frequently for further explanation
of the input fields.
1. Input security using input screen L. Input all information to get it
to calculate with F5. Also input shares underlying par value on front
page and equity ticker on second page.
2. A zero coupon curve will be used for net present value discounting.
To produce it input:
a. A Treasury Yield Curve in the ShftF4 (or ^Y) yield curve database.
The second of the two input screens will allow for finer granular-
ity on the short end.
b. On the ShftF6 Portfolio Parameter input screen you must designate
the name of the Yield Curve Base being used as the Treasury Curve.
c. A spread over the yield curve can be inputted two ways. Either:
i. Input a spread curve on the F11 popup inside the security.
ii.Assign a rating in the primary rating field, either S&P or
Moody's. Moody's ratings will be directly mapped to S&P.
Each bond must also be assigned the name of an existing
Using ShftF10 (or ^M) input a Spread Matrix. You need not fill in
all input fields. Blank spreads within the matrix will be inter-
polated from surrounding rows. BondCalc will then interpolate
values not explicitly inputted and extend nearest value for time
periods beyond inputted range. You can print out a copy of the
filled in matrix with F6.
3. Input Prediction rules on security input Alt-V popup screen:
The analysis ending parameters will not be included in the decision
process if inputs are left blank.
Vol. Conv. when Stock > Carrying Value -
Trad Convert: this usually does not apply but a number should be
entered in case the issue fails the dividend test discussed
next. Can use the same number as below.
LYONs: How much into the money before you will voluntarily
convert? Suggestions are to use the same number entered next or
to make an assumption like 50%.
Issuer Call when Mkt Value > Call Price - Usage depends on whether
the convert is traditional or a LYONS. LYONs are generally not
called by the issuer as the LYON is creating tax benefits and not
paying dividends. For a traditional calling after the issue is in
the money appears to be a common practice. Additionally there is
a test that common dividends have to be less than the after tax
interest for the issuer before a forced conversion takes place.
This is usually the case, but when dividends are higher on a pre-
tax basis the previous rule will apply. From a theoretical point-
of-view the issue should be called as soon as it reaches its call
price and not before. The argument goes that a manager's
objective is to increase shareholder value which is the same as
minimizing bondholder value. This can be demonstrated by cloning
an issue and creating variants with different decision rules.
Note that the investor is protected by the three year non-call
feature of the new convert. Commmon practice is to call the
convert around 25% to protect against a stock price decline
during the 30 days the offer is open.
Put when Mkt Value < Put Value - This would apply to a LYONs only.
Enter the percentage of the underlying share market value compared
to the Put Value that would convince you to take advantage of the
put. In reality more factors are involved in the put decision,
such as, the prospects of the company, how far away the next put
is and whether the next put is at a higher yield. A suggested
number is 67%
Call Price > Carrying Value (FX Issues) - applies to securities
where the issuing country is different from the underlying
currency. [Not yet implemented.]
4. Input the equity information underlying the security in the ^E Equity
Data saved here is needed by the convertible bond conversion
analysis, or Predictions. It is also available as columns in
the Report Writer.
Ticker - Enter in sync with input on second page of single
Asset Type - 0/Blank - Common Stock, 1-Oil, 2-Gold, 3-ADR.
Underlying Asset Price - in base currency.
Distribution Curve - Program will build curve and use to
consolidate results into one number:
Center Growth Rate -
Standard Deviation of Growth -
Dispersion Type - 1-Log Normal
Indicated Dividend - in base currency. In the voluntary
conversion test this is used to test when dividends exceed
Dividend Growth Rate - in annual percent. Used with the above.
Company Name - Report Writer column and used as label.
5. Input parameters to control output on F7 off of ShftF6 popup screen:
Stock Growth Rate for Graph - The minimum and maximum for the X-axis
in the IRR and NPV line graphs.
Stock Growth Rate for Detailed Reports - When selected from the
Convertible Bond Conversion Analysis, a detailed cash flow report
will be generated for each of the rates entered here.
Equity Data Table to Use - Predictions gets stock price and dividend
information from an equity database. Entering a name here is
optional. If blank the program defaults to a database with the
filename of MAIN. If a name is entered ^E or ShftF8 will bring up
a full file system with the named database being the one used in
Balancing Method - Methods available:
3-$/$ - the default.
5-Pr/Pr - excludes accrued interest.
Principal Amount to Balance at - For portfolio graph. Defaults to
Discounting Method - Available for Predictions output are now:
NPV- 1- Spot discounting, spread added to spot rate
2- Spot discounting, spread added before spot curve built
[ -Interpolate average life from yield curve]
[ -Use discount rate/yield curve designated inside security]
IRR- 0-Straight IRR
6. Inside the security press F6 for the Output Menu. The predictions
reports and graphs are on the third menu page. Reports are:
Convertible Decision Matrix - Available only for convertibles.
Using the parameters entered on the Alt-V input popup it will
produce a report showing the decision timings and which
decision was made for the per annum stock growth rates.
Predictions Cash Flow Reports - Available in pretax only.
Shows how the numbers are derived for the following two graphs.
Select which growth rates to print for on F7 off ShftF6 screen.
Predictions Line Graphs, NPV/IRR - For a range of per annum
stock growth rates, as specified on the F7 off ShftF6 Screen,
will graph either: (1) a NPV graph using the zero spot curve,
or (2) an IRR plot. [Future variations will be settable on F7
off ShftF6 screen.]
7. In the Portfolio section graphs corresponding to the ones on the
Single Security Menu are available on the second output menu page.
They will graph only the first seven issues in the portfolio, but all
will be included if output is sent to a report or spreadsheet file.