Question
A convertible bond has a 6.20%, semi annual coupon and a conversion rate of $31.25. The bond has a face value of $1000 and matures
A convertible bond has a 6.20%, semi annual coupon and a conversion rate of $31.25. The bond has a face value of $1000 and matures in 11.5 years. The current yield to maturity for bond of similar risk is 6.2% but due to the bond's convertible feature, it usually trades at a 5% premium over the non convertible bond. Assume that you buy this bond today and sell it or convert it to stock one year from no when the yield to maturity is 6.8% and the stock price is $38. What will be your return on this investment, and indicate whether you sold the bond or converted it stock? (show all work)
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