Comparative analysis of stock and convertible bonds

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Assume you bought a convertible bond two years ago for $900. The bond has a conversion ratio of 32. When the bond was purchased, the stock was selling for $25 per share. The bond pays $75 in annual interest. The stock pays no cash dividend. Assume after two years the stock price rises to $35 and the firm forces investors to convert to common stock by calling the bond (there is no conversion premium at this time).

Would you have been better of off you (a) had bought the stock directly or (b) bought the convertible bond and eventually converted it to common stock? Assume you would have invested $900 in either case. Disregard taxes, commissions, and so forth. (Hint: Consider appreciation in value plus any annual income received. See Table 13-3 on page 346 for an example.)

Reference no: EM131072738

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