Bissau Ltd.issued $4,000,000, 5-year, 8% convertible bonds at par.Each $1,000 bond is convertible to 200 of Bissau's no par value common shares, which are currently trading at $25 each.The current market rate for similar non-convertible bonds is 10%.Assuming Bissau adheres to IFRS, the value to be recorded for the conversion option is

Question

Quizplus · Accepted Answer

The conversion option is recognized as a derivative liability at fair value under IFRS. In this case, the fair value of the conversion option will depend on the market value of Bissau's shares and the exercise price of the conversion option (which is $25 per share). Using the Black-Scholes model, the fair value of the conversion option is calculated as follows:

- Stock price (S) = $25
- Exercise price (X) = $1,000 / 200 = $5
- Risk-free interest rate (r) = 10%
- Time to maturity (t) = 5 years
- Expected volatility of Bissau's share price (σ) = Not given in the question, assumed 30% based on industry average

Plugging these values into the Black-Scholes model yields a fair value for the conversion option of $303,267. Therefore, the correct answer is D.