Question

You are considering investing $860 in Higgs B. Technology Inc. You can buy common stock at $26.06 per share; this stock pays no dividends. You can also buy a convertible bond ($1,000 par value) that is currently trading at $860 and has a conversion ratio of 28. It pays $51 per year in interest. If you expect the price of the stock to rise to $38.78per share in 1 year, which instrument should you purchase?

1) The holding period return on the purchase of the common stock would be ___%

2) The holding period return on the purchase of the convertible bond would be ___%

3 Which instrument should you purchase? (select the best answer below)

You should purchase the convertible bond because the holding period return is higher than the holding period return on the common stock.

or.

You should purchase the common stock because the holding period return is higher than the holding period return on the convertible bond.

Answer 1