Consider a convertible bond with the information given below; assuming the bond is non-callable and...
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Finance
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 goes up from $20 to $30 per share.
- a. What will be the approximate difference in the realized rates of return from investing directly in the underlying stock versus investing in the convertible bond? (2 points)
- Why did the difference calculated in part a. above occur? (1 point)
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