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Term · Valuation

Convertible Debt Floor

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In briefThe convertible debt floor is the lower economic value of a convertible bond, derived solely from the pure bond value without the conversion option. For companies with convertible bonds it helps to assess debt risk and the dilution option separately.

Definition

The lower economic value of a convertible bond, determined by the pure bond value without the conversion option.

How it is calculated

Formula. Bond Floor = present value of coupons and repayment without the equity option.

Why it matters for small caps

For smaller listed companies with convertible bonds, the convertible debt floor helps to assess debt risk and the dilution option separately.

Common misreadings

  • It is overlooked when only the potential dilution is considered; credit risk and repayment obligation also remain relevant.

In the process

→ Used in Step 5 – Valuation check

Frequently asked

What is the convertible debt floor?
It is the bond value of a convertible without accounting for the conversion right. It forms the economic lower bound of the instrument.
How is the bond floor determined?
You discount the future coupons and the repayment to present value without the equity option. This yields the pure bond value.
Why does the debt floor matter?
Those who look only at the dilution option easily overlook it. But credit risk and repayment obligation remain just as relevant.

Related terms

Convertible BondDilutionOption Overhang

Sources

Primary
Bundesministerium der Justiz – Aktiengesetz (AktG)
https://www.gesetze-im-internet.de/aktg/
Methodology
EUR-Lex – EU-Prospektverordnung, Verordnung (EU) 2017/1129
https://eur-lex.europa.eu/eli/reg/2017/1129/oj
Category: Valuation · Hybrid InstrumentsRelevance: AdvancedJurisdiction: International

Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.