Question
Suppose an investor is considering the purchase of a stock or a convertible bond of COMPANY Z. The stock of the company can be purchased
Suppose an investor is considering the purchase of a stock or a convertible bond of COMPANY Z. The stock of the company can be purchased at 18.
The following information is for the convertible bond. The bond has a face value of 1,000, an annual coupon rate of 5% (coupons are paid every six months) and a maturity of 4 years. Similar bonds are selling to yield 9% annually. The current market price of the bond is 925. The conversion ratio is 50. Assume that the investor decided to purchase the convertible bond and that 2 months later, the price of the stock went to 13. What is the return to the investor from having bought the convertible bond.
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