You purchased one of AAA Corp.’s 9%, 15-year convertible bonds at its $1,000 par
ID: 2711634 • Letter: Y
Question
You purchased one of AAA Corp.’s 9%, 15-year convertible bonds at its $1,000 par value a year ago when the company’s 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’s stock instead of the bond?
Explanation / Answer
a)Bond Investment
Amount invested in bond = 1000
Coupon received = 1000 x 9% = 90
No. of stocks after conversion = 1000/35 = 28.5714
Sale value of stock = No. of stocks x price per share at the time of sale
= 28.5714 x 40
= 1142.86
Total return = (sale value + coupon – Amount invested)/ Amount invested
= (1142.86 + 90 – 1000)/1000
= 23.29%
Stock Investment
Amount of invested =1000
No of stocks = 1000/25 = 40
Selling price = 40
Sale value = 40x40
=1600
Total return = (Sale value + dividend – amount invested)/ amount invested
= (1600 +0 -1000)/1000
= 60%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.