Straight value
The value of a convertible bond as if it had no conversion option, from discounting its coupons and principal. It acts as a bond floor under the price while the issuer's credit holds.
Where you will meet it
Straight value appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Work out the parts that make up a convertible bond's value and explain what they mean
“A convertible's minimum value is the higher of its conversion value and its straight value, the value of the same bond without the conversion option.”
- Explain how to value a convertible bond within an arbitrage-free framework
“A plain convertible is worth its straight value plus a call option on the shares covered by the conversion ratio.”
- Weigh the risk and return profile of a convertible bond against the profiles of a straight bond and the underlying common shares
“When the share price is far below the conversion price, the convertible is busted: it trades near its straight value and behaves like a bond, driven by rates and credit.”
See also
Practise it
Practise straight value until it is automatic: questions that explain every wrong option.
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