Question: Consider a convertible bond with the information given below; assuming the bond is non-callable and non-puttable. Maturity = 10 years Coupon rate = 8% Conversion

Consider a convertible bond with the information given below; assuming the bond is non-callable and non-puttable.

Maturity = 10 years Coupon rate = 8% Conversion ration = 40 Par value = $1,000 Convertible bonds current market price = 920 Current market price per share of the underlying stock = $20 Annual dividend per share = $0.50 Comparable bonds without the conversion option are trading to yield 12%

Suppose, in one month from now, the price of the underlying stock declines from $20 to $10 per share.

1. What will be the approximate realized rate of return from investing in the convertible bond?

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