CERTYNEX IFRS ACADEMY

Opéra SA issues bonds convertible into a fixed number of shares, with a 3% coupon. Case facts: an ordinary loan of the same term and ranking and with no conversion option would be financed at 6.5%; the risk-free rate is 2%; shareholders expect a return of 11%. Which rate does management use to discount the cash flows of the liability component?

The 3% rate, that of the convertible bond's coupon, since it is the rate stipulated by the bond issue contract.

The 11% rate, that of the return expected by shareholders, since it measures the value of the conversion option offered.

The 6.5% rate, that of a similar liability without a conversion option, which is a judgement datum of the case and not a rate imposed by the standard.

The 2% rate, that of a risk-free investment, whatever the issuer's own credit risk on the convertible bond.