5. Consider two convertible bonds X and Y, which for simplicity are assumed to be riskless.

The following table provides information about the two bonds. Calculate the conversion value. What is the yield to maturity of the convertible bonds based on the actual bond price?

Convertible Bond X Convertible Bond Y Annual coupon 50 50 Time to maturity 5 years 5 years Conversion ratio 30 40 Stock price $25 $30 Conversion value ? ?

Yield on 5-year Treasuries 5% 5%

Value of straight debt 913.41 913.41 Actual convertible bond price 920 1207 Yield to maturity of convertible ? ?

Examine the information given in Table 19.2 in the text. Consider a trader that buys the convertible bond because it views the implied volatility as cheap and expects the implied volatility of the bond to correct. If the trader decides to hedge the long convertible bond position, how many shares does he have to short to be delta neutral?