An 8% convertible bond carries a par value of $1,000 and a conversion ratio of 20. Assume that an investor has $5,000 to invest and that the convertible sells at a price of $1,000 (which includes a 25% conversion premium). How much total income (coupon plus capital gains) will this investment offer if, over the course of the next 12 months, the price of the stock moves to $75 per share and the convertible trades at a price that includes a conversion premium of 10%? What is the holding period return on this investment? Finally, given the information in the problem, determine what the underlying common stock is currently selling for.
Answer to relevant QuestionsA certain bond has a current yield of 6.5% and a market price of $846.15. What is the bond’s coupon rate? An investor lives in a state with a 3% tax rate. Her federal income tax bracket is 35%. She wants to invest in 1 of 2 bonds that are similar in terms of risk (and both bonds currently sell at par value). The first bond is ...Is there a single market rate of interest applicable to all segments of the bond market, or are there a series of market yields? Explain and note the investment implications of such a market environment. How might you, as a bond investor, use information about the term structure of interest rates and yield curves when making investment decisions? An investor is considering the purchase of a $1,000 par value bond with an 8% coupon rate (with interest paid semiannually) that matures in 5 years. If the bond is priced to yield 6%, what is the bond’s current price?
Post your question