You purchased one of Big Corp.\'s 8% 10-year convertible bonds at it\'s $1,000 p

Question

You purchased one of Big Corp.'s 8% 10-year convertible bonds at it's $1,000 par value a year ago when the company's common stock was selling for $20. Similar bond without conversion feature returned 12% at the time. The bon is convertible into stock at a price of $30. The stock is now selling for 5. Assume no dividends. A.) you exercise the coversion feature today and immediately sold the stock you received. Calculate the total return on your investment. B.) What would you return have been if you had invested $1000 in Big's stock instead of bond? I need the answer for a and the answer for b

Explanation / Answer

This is a simple calculation, but it reminds us that we need to include dividends (where appropriate) when figuring the return of a stock. Here is the formula:
(Value of investment at the end of the year

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