A convertible bond has a 740 percent semi-annual coupon and


A convertible bond has a 7.40 percent, semi-annual coupon and a conversation rate of $31.25. The bond has a face value of $1,000 and matures in 11.5 years. The current yield to maturity for bonds of similar risk is 6.2 percent, but due to the bond’s convertible feature, it usually trades at a 5 percent premium over the non-convertible bond. Assume that you buy this bond today and sell or convert it to stock one year from now when the yield to maturity is 6.8 percent and the stock price is $38. What will be your return on this investment, and indicate whether you sold the bond or converted it to stock?

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Financial Management: A convertible bond has a 740 percent semi-annual coupon and
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