In 1996 Marriott International made an issue of LYONS. The bond matured in 2011, had a zero

Question:

In 1996 Marriott International made an issue of LYONS. The bond matured in 2011, had a zero coupon, and was issued at $532.15. It could be converted into 8.76 shares. Beginning in 1999 the bonds could be called by Marriott. The call price was $603.71 in 1999 and increased by 4.3 percent a year thereafter. Holders had an option to put the bond back to Marriott in 1999 at $603.71 and in 2006 at $810.36. At the time of issue the price of the common stock was about $50.50.

(a) What was the yield to maturity on the bond?

(b) Assuming that comparable nonconvertible bonds yielded 10 percent, how much were investors paying for the conversion option?

(d) What was the initial conversion price of the bonds?

(e) What is the conversion price in 2005? Why does it change?

(f) If the price of the bond in 2006 is less than $810.36, would you put the bond back to Marriott?

(g) At what price can Marriott call the bonds in 2006? If the price of the bond in 2006 is more than this, should Marriott call them?

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