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.

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.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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