Question

• . Dash Incorporated has the following convertible bond outstanding:

Coupon	5%
Principal	$1,000
Maturity	12 years
Conversion price	$33.34
Conversion ratio	30 shares
Call price	$1,000 + one year’s interest = 1050

• The bond’s credit rating is BB, and comparable BB-rated bonds yield 9 percent. The firm’s stock is selling for $25 and pays a dividend of $0.50 a share. The convertible bond is selling for $1,000
• • If the bond is not converted, what does the investor receive when the bond matures? What is the annual return on the investment?

Answer 1

		If the bond is not converted:
	Fv	Amount investor receives at maturity	$1,000
	Pmt	Annual coupon received	$50	(1000*5%)
	Nper	Number of years to maturity	12
	Pv	Issue price	$1,000
	RATE	Annual return on the investment	5.00%	(Using RATE Function of excel with Nper=12,Pmt=50, Pv=-1000, Fv=1000)
		Excel Command:RATE(12,50,-1000,1000)
		Amount received when bond matures	$1000		Annual Return	5%