1. Five years ago, Caymans Crafters, Inc. issued new 25 year convertible bonds with a 4% coupon rate, compounded semi-annually. The bond has a par value of 10,000. The markets required rate of return on similar securities at the time of issuance was 3.8%, compounded semi-annually. The bond indenture indicates that conversion ratio is 175, that is 1 bond can be converted in to 175 shares of Caymans common stock. Today, the yield to maturity on 20 year bonds is 2.6%, compounded semi-annually and 2.8%, compounded semi-annually on 25 year bonds. The current market price of the stock is $65. You purchased the bond 5 years ago. Decide whether you should convert the bond today or sell it today. Based on your decision, calculate the rate of return you earned while holding the bond over the 5 year period?

2. Cayman