Q5. Assume you buy $1,000 of a convertible bond at par, which was offered at a 2.5%

discount to its theoretical value. The stock price on the day of purchase is $35, and

carries a 1% dividend yield. The convertible bond has a 4% coupon, a conversion

premium of 20%, and a delta of 56%. Interest income from the short position is

1.5%, and stock borrow cost is 0.25%. During a one-year holding period, the stock

moves 3 times. The percentage change in stock price, corresponding convertible

bond value, and new delta ratio, in sequential order are as follows: +7% / $1,037.12

/ 61%; -5% / $1,012.11 / 58%; +4% / $1,032.71 / 60%. Calculate the returns

generated from this investment after one year, broken out by Income Generation,

Monetizing Volatility, and Purchasing an Undervalued Convertible. Ignore

transaction costs for the purposes of this exercise.