Module II· EV-Equity BridgeIntermediate

Question

How do you treat convertible bonds in the bridge?

Answer

Mechanics

Convertibles are debt with an equity conversion option. The treatment depends on whether the option is in-the-money (ITM) or out-of-the-money (OTM):

ITM (share price > strike): as-if-converted method − treat as equity, increase the share count in the equity-value calculation, no debt deduction.
OTM (share price < strike): treat as pure debt − deduct from EV, no dilution of the share count.

Borderline cases

Black-Scholes valuation of the conversion option and hybrid treatment.

IB pitch standard

ITM as-if-converted, OTM as debt.

Deep diveShow more details

Pitch tip

'Convertible $200m at $45 strike, current share price $52 − in the money, treated as 4.4m additional shares; share count increases from 100m to 104.4m.'

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