Purchase Solution

# Convertible Bonds and YTM Issue

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A company issued \$20 million of 15-year convertible bonds in October of 2003. At the time, market interest rates for straight bonds of similar quality were 6.4%. The company's convertible bonds had a coupon rate of 4% and sold for \$1,120 when issued. The bond paid semi-annual interest. The bonds have a conversion ratio of 40. When the bonds were issued the company's stock price was \$14.50. Today (October 22, 2009) the stock price is \$32.00 per share.

A. What was the yield-to-maturity of the bonds on the day they were issued?
B. What would the bonds sell for today?
C. If an investor bought the bonds at issuance for \$1,120 and sold them today (6 years later), what is the investor's annual rate of return?

##### Solution Summary

Convertible bonds are examined. YTM at issue and ROR are determined. The solution is provided in an Excel spreadsheet.

##### Solution Preview

Current interest rate 6.40%
Maturity 15 years
30 semiannual
Par \$1,000
Coupon rate 4% annual
2% semiannual
Coupon payment \$20 ...

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