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    Convertible Bonds and YTM Issue

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    Please help with the following problem.

    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?

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    Solution Preview

    Please see attached file for answers.

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

    Solution Summary

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