Convertible bonds

Convertible bonds are hybrid debt instruments that give the holder the right (or obligation) to convert into equity at a predetermined price during a defined period. They combine the downside protection of a fixed-income instrument (bond floor) with equity upside participation through the conversion option. Under IFRS 9, convertible bonds are compound financial instruments requiring bifurcation: the debt host is valued at amortised cost while the equity derivative (conversion option) is fair valued. Their valuation uses option pricing models (Black-Scholes or binomial) to value the conversion feature separately.

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Example: a Swiss company issues CHF 5.0 million of 5-year convertible bonds at 2.5% coupon, convertible into shares at CHF 120 per share. At issuance, the bond floor (straight bond value) is CHF 4.2 million and the conversion option value is CHF 0.8 million. At a share price of CHF 135 at maturity (above conversion price), holders convert — receiving shares worth CHF 5.6 million versus repayment of CHF 5.0 million in cash.

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Hectelion values convertible bonds and their equity components for IFRS accounting, tax and transaction purposes.