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Valuation – convertible bond.
You purchased one of Big Corp.’s 8%, 10-year convertible bonds at its $1,000 par value a year ago when the company’s common stock was selling for $20. Similar bonds without a conversion feature returned 12% at the time. The bond is convertible into stock at a price of $30. The stock is now selling for $35.
Assume no dividends.
a) You exercise the conversion feature today and immediately sold the stock you received. Calculate the total return on your investment.
b) What would your return have been if you had invested $1,000 in Big’s stock instead of the bond?
Your brother, who is 6 years old, just received a trust fund that will be worth $24,000 when he is 21 years old. If the fund earns 0.10 interest compounded annually, what is the value of the fund today?
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