KYNEX Bulletin

January 2007

Convertible Details Glossary

The following is a list of terms from the convertible details page and their respective definitions. If you have any further questions on these terms please call us at 201-796-4900 or email us at service@kynex.com.

Input	Definition
Current Yield	The coupon divided by the convertible price.
Conversion Premium	The percent difference between the convertible price and the parity.
Break Even	Break Even is number of years to the cash flow date where the income less expense equals or exceeds the point premium; where income = coupons + (div cash pass thru) * conversion ratio * spot FX rate and expense = dividend * conversion ratio * spot FX rate. The Break Even Outright assumes the investor is short 100% of the underlier and the Break Even Hedge assumes the investor is Delta neutral.
Hard Call Protection	Number of years until the convertible becomes callable by the issuer.
Soft Call Eff. Trigger/Years	A probability-weighted calculation is performed to determine how high, on average, the stock price will have to be if is it is constrained to be above the soft call trigger level for (say) 20 out of 30 trading days. This yields an Effective Trigger which is the equivalent trigger price the parity must attain if the soft call were based on a knock-out. The Effective Trigger therefore depends on the stock volatility. "Years" is the number of years the soft call is in effect.
Median Exp Life	The average time that the convertible is expected to survive. It is calculated as a probability weighted average based on the following outcomes (a) redemption (b) voluntary conversion (c) call by issuer (either for cash or force a conversion) (d) put by investor.
Yield to Put	The discount rate that equates the current market price with the present value of the expected future cash flows. The cash flows consist of the coupon payments and put price.
Yield to Call	The discount rate that equates the current market price with the present value of the expected future cash flows. The cash flows consist of the coupon payments and call price.
Yield to Maturity	The discount rate that equates the current market price with the present value of the expected future cash flows. The cash flows consist of the coupon payments and the redemption amount.
Stock Yield	The current IAD (Indicated Annual Dividend, see below) divided by the current stock price.
Ex-Dates Conv/Stock	The ex date of the next payable dividend on the convertible/underlying stock.
Parity	What the investor would receive if they converted the convertible now. Parity = Stock Price * Free Ratio + Cashback
Pt. Premium	Point Premium is the difference between the convertible price and the parity expressed in bond points.
Fair Value	Theoretical price of the convertible calculated using the stock price, assumed spread, volatility, div assumptions and borrow cost. If the convertible is quoted without accrued interest (typical for bonds) in the market, the Fair Value does not include accrued interest.
% Cheap	Theoretical value less market price expressed as a percentage of theoretical value. A negative number indicates a market price above theoretical value.
Investment Value	What the convertible will be worth if the stock price goes to zero. If the bankruptcy mode is on, the investment value is the present value of the cash flows to the next put/maturity.
% Premium	The percent difference between the Convertible price and the Investment Value.
Delta Hedge	This is the Per-Share Delta or hedge ratio. This number is used to determine the number of shares to hedge. Delta Hedge * Conversion Ratio * .01 * Convert Position = Shares of common to hedge
Delta Outright	This is the Per-Bond Delta expressed in percentage terms for a 1% move in the underlying stock. For outright investors, this is the expected price participation of the convertible in the movement of the stock price.
Gamma 1%	This is the expected change in the per-share delta for a 1% increase in the stock price.
Rho (100bps)	This is the expected change in the theoretical value for a 1 bps increase in interest rates multiplied by 100 for readability. (For floating-rate convertibles, the projected coupons are recalculated.)
Vega 1pt / 1%	The expected change in the theoretical value for a 1pt/1% increase in the volatility assumption.
Credit Spread (100bps)	The expected change in the theoretical value for a 1 bps increase in the credit spread assumption multiplied by 100 for readability.
Div Yld (1%)	The change in the theoretical value of the convertible for a 1% increase in the stock yield.
Borrow Cost (100bps)	The change in the theoretical value of the convertible for a 100 bps increase in the borrow cost where borrow cost is the (Finance Rate – Rebate Rate + Stock Loan Fee).
Implied Spread	The spread implied by the stock price, assumed volatility and the market price of the convertible.
Implied Vol	The volatility implied by the stock price, assumed spread and the market price of the convertible.
Implied Delta	The Per-Share Delta (i) using the implied spread and the assumed volatility and (ii) using the implied volatility and the assumed spread.
Assumed Spread	The spread in basis points over the chosen yield curve to value the convertible security determined by the company’s credit worthiness.
Assumed Vol	The annualized risky volatility in % used to value the convertible security.
Call Adjustment	Setting the call adjustment to Parity+ and putting a number of 20 will make the model value the convertible such that the issuer will not call the convertible until the parity is at least 20% above the call price. NCL stands for Non Call Life.
Borrow Cost	Finance Rate – Rebate Rate + Stock Loan Fee Where the Finance Rate is the rate which your broker charges you to finance the convertible and the Rebate Rate is the rate used to calculate the rebate on your short-sale proceeds and the Stock Loan Fee is the rate the broker charges you for borrowing the stock.
IAD	Indicated Annual Dividend. The page will default to the current indicated annual dividend of the underlying stock. You may change this to simulate dividend increases/decreases. The IAD is only used in valuation when Continuous is selected under Div Type.
Risky Model	The Kynex recommended methodology to calculate the Fair Value and greeks. The stock growth is at the risky rate, the discounting of the cash flows is also at the risky rate.
Bond + Option	Alternative methodology to calculate the Fair Value and greeks. The convertible is divided into a "straight bond" and a call option. The straight bond is valued at the risky rate, and the option is valued using the risk-free rate. Kynex does not recommend this methodology. It is supported for historical reasons.
Blended	Alternative methodology to calculate the Fair Value and greeks. The convertible is visualized as interpolating from a straight bond (at zero parity) to a pure equity call option (infinite parity). The applicable interest rate is interpolated between risky (at zero parity) to risk-free (infinite parity). Kynex does not recommend this methodology. It is supported for historical reasons.
Stock Spread	You can specify the spread to grow the stock in the finite difference grid. Input the same value as the assumed spread to value the convertible risky/risky (recommended), 0 for risk-free risky, or something else for a custom setting.
Bankruptcy	Enable the bankruptcy model to simulate risk-of-default for a convertible. For more details click here.
Inv. Screwed	This flag tells the convertible valuation model if the investor will receive a coupon payment if the bond has been called for redemption effective on the interest payment date. If the box is checked it indicates to the model that the investor is getting screwed out of the coupon and will not receive the interest payment. If the box is unchecked the investor will receive the interest payment if the convertible is called for redemption and the investor is forced to convert on the interest payment date.
Call Effective Date	If a bond is called, this is the date on which the call is effective. This box will not be filled for partial redemptions. You can use this input to value convertibles to simulate expected future call by the issuer.
Div Prot	Allows user to value the bonds with or without the dividend protection feature. For bonds that do not have the dividend protection feature, this input should have no effect on valuation.
Div Type - Continuous	A methodology for including dividends in the valuation model. The dividend payments are applied continuously over time. The stock yield is calculated using the IAD (Indicated Annual Dividend) and spot price. The stock yield is then applied to determine a dividend amount at every (stock,time) node in the valuation grid.
Div Type - Discrete	A methodology for including dividends in the valuation model. The dividend payments are applied at specific dates (supplied in the dividend schedule). The dividend amount can be a fixed number, or a proportional amount. In the latter case the dividend payment will be proportional to the stock price at the nodes in the valuation grid on the specified dates.
CashCallParity	Issuer will call the convertible if parity is below a specified level. Entering 95 in this box will say the issuer will call if parity is between 95% and 85.5% (90% of 95) of the nominal (or accreted value, for accreting bonds).
Trg Days	Convertible securities that are provisionally callable usually require the stock price to close above the trigger price for a pre-set number of days (x) out of yet another pre-set number of days (y), such as 20 out of 30, 15 out of 20, etc. This field specifies x days out of the given y days.

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