definition of debenture for those that do not get it. Examples
Using the following as an example, we will explain the terms used as column descriptions in our convertible debentures listing with two different prices for the common share. The date to maturity and the general level of interest rates are assumed to be constant. The debenture is assumed to have been bought at par or $1000. The first example will price the debenture out of the money; the second will be in the money.
Example:
A $1000, 6% convertible unsecured subordinated convertible debenture maturing in five years, with an exchange ratio of 50. The common shares into which the debenture is convertible have traded in a range of $10-$30. The debenture would then be convertible at the rate of $20 per share. ($1000/50=$20)
In the money-
If the common shares were trading at $30 and the debenture holder had the right to convert at $20 per share then there is a $10 benefit per share that would be added. The $1000 face value debenture could then be exchanged into 50 shares worth $30 per share or $1500. In theory the debenture would then trade at $1,500 and the holder would continue to collect interest at the rate of 6% on the $1,000 face value debenture.
Out of the money-
If the common shares dropped in value to $10, then the debenture would be exchangeable for 50 shares worth $500. The exchange would not occur since the holder would lose $500. The reason to hold the debentures would be to receive the 6% interest payment, and the debentures would be trading out of the money and be valued based on the security and amount of the interest payment.