Consider the convertible bond by Miser Electronics:

• par value = $1,000

• coupon rate = 8.5%

• market price of convertible bond = $900

• conversion ratio = 30

• estimated straight value of bond = $700 Assume that the price of Miser Electronics common stock is $25 and that the dividend per share is $1 per annum.

Suppose that the price of the common stock of Miser Electronics increases from $25 to $54.

a. What will be the approximate return realized from investing in the convertible bond if an investor had purchased the convertible for $900?

b. What would be the return realized if $25 had been invested in the common stock?

c. Why would the return be higher by investing in the common stock directly rather than by investing in the convertible bond?