What would your rate of return be if you bought

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Reference no: EM133369102

Question: Vernon Glass Company has $10 million in 10 percent, $1,000 par value convertible bonds outstanding. The conversion ratio is 60, the stock price is $15, and the bond matures in 10 years. The bonds are currently selling at a conversion premium of $65 over their conversion value.

If the price of the common stock rises to $21 on this date next year, what would your rate of return be if you bought a convertible bond today and sold it in one year? Assume on this date next year, the conversion premium has shrunk from $65 to $15. (Hint: Calculate rate of return as (Future bond price - Current bond price + Interest earnings) / Current bond price))

Reference no: EM133369102

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