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# Investment in Convertible Bond or Stock

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You purchased one of AAA Corp's 9%, 15- year convertible bonds at its \$1000 par value a year ago when the company's common stock was selling for \$25. Similar bonds without conversion feature returned 10% at the time. The bond is convertible into stock at a price of \$35. The stock is now selling for \$40.

Assume no dividends
You exercise the conversion feature today and immediately sold the stock you received. Calculate the total return of your investment

What would your return have been if you had invested \$1000 in AAA's stock instead of bond?

#### Solution Preview

1. No. of Share received after conversion = 1000/35 = 28.57 or let say 29 shares.

Gain on sale of ...

#### Solution Summary

The solution provide an example, where return are compared in two different scenarios - first investment in convertible bond & then conversion & subsequent sale of stock & second investment in stock and sale of stock.

\$2.19