Question

A convertible bond with a face value $5,000 can be converted into common stock at the rate of $40/share. This stock's next expected dividend is forecast to be $0.95 and dividends are expected to grow at a rate of 3% indefinitely. This stock's current market price is identical to its intrinsic value. Furthermore, this stock's beta is 1.1 and currently the market return is 12%. Calculate the conversion value of this bond, rounded to the nearest whole number, assuming the risk free rate is currently 4.5%.

A. Cannot be determined from the given information

B. $10

C. 125 shares

D. $1,218

Investor X and investor Y enter into an equity swap agreement for four years based on a notional principal amount of $500,000. Investor X who currenty holds a large portfolio of equity investments that he expects will decline in value wants to move into fixed rate securities. Investor Y is in the opposite situation. Investor X agrees to pay investor Y the return on the DJIA in exchange for a fixed payment that is based on an annual interest rate of 8%. The returns on the DJIA during this four year period are 12%, 16%, (8%) and 4%, respectively. Calculate the net cash flow to investor Y during the 2nd year of this swap agreement.

A. $40,000

B. $20,000

C. ($20,000)

D. ($40,000)

Answer 1