26. In 1996 Marriott International made an issue of unusual bonds called Liquid Yield Option Notes, or LYONS. The bond matures in 2011, has 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% 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%, how much were investors paying for the conversion option?

c. What was the conversion value of the bonds at the time of issue?

d. What was the initial conversion price of the bonds?

e. What was the conversion price in 2005? Why did it change?

f. If the price of the bond in 2006 was less than $810.36, would you have put the bond back to Marriott?

g. At what price could Marriott have called the bonds in 2006? If the price of the bond in 2006 was more than this, should Marriott have called them?

CHALLENGE