You purchased one of AAA Corp.%u2019s 9%, 15-year convertible bonds at its $1,00

Question

You purchased one of AAA Corp.%u2019s 9%, 15-year convertible bonds at its $1,000 par value a year ago when the company%u2019s common stock was selling for $25. Similar bonds without a conversion feature returned 10% at the time. The bond is convertible into stock at a price of $35. The stock is now selling for $40.

Assume no dividends.
a) You exercise the conversion feature today and immediately sold the stock you received. Calculate the total return on your investment.

b) What would your return have been if you had invested $1,000 in AAA%u2019s stock instead of the bond?

Explanation / Answer

purchase Price = 90*7.60+239.39 = 923.39

amount invested = $ 923.39

price of bond= 90*7.36+ 263.33

= $925.73

no of bond it will receive at this price = 925.73/35 = 26.44

given that price of one stock = $40

hence the total price = no. of bonds * quantity

= $1057.6

therefore net return = $1057.6-923.39

= $134.21

b)from the first part as we ve got amount invested= $923.39

therefore total no. of stocks purchased= 923.39/25 = 36.93

therefore it ll sell its product at = 40*36.93 = 1477.2

therefore the final return ll be = $1477.2-923.39

= $553.81

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