Problem
Pilly Ltd issued 10 million $4 notes on 1st July 2014 with a coupon rate 8% per annum when the market interest rate for similar debt without the conversion option was 10%. The notes have a ten-year term and are issued at par with a face value of $1 000 per note. The interest is paid at the end of each year. The bonds/notes may be converted to ordinary shares in Pilly Ltd at any time in the next 10 years.
On 1st July 2018 all the holders of the convertible notes decide to convert the bonds to shares in Pilly Ltd.
Note: To answer, use either the following formulas or the appropriate rates given below:
Present Value: 1/(1 + k)n
Annuity Value: [1 - 1/(1 + k)n]/ k
Present value of $1 at 8% and 10-year period is 0.463193488; at 10% and 10-year period is 0.385543289. Present value of an annuity of $1 at 8% and 10-year period is 6.710081399; at 10% and 10-year period is 6.144567106.
Task
1. Calculate and record the issue of the securities on 1st July 2014.
2. Recognise the interest payment on 30th June 2015 and 30th June 2016.
3. Recognise the conversion of the bonds to ordinary shares on 1st July 2018.