You purchase a $1,000 bond that is convertible for 20 shares of XYZ stock, which is currently selling for $40 per share. The bond is a 20 year bond with 8% coupons, payable semi-annually. You purchased it to yield 9% to maturity. If you assume that the price of the stock will increase at 7.5% per year, and that you will convert when the value of the stock is more than 20% higher than the Face Value of the Bond:
a. How much should you pay for the bond?
b. How long will it be before you convert the bond (assuming you can only convert on the anniversary of the bond)?
c. what will be the value of the stock once converted?
d,what is your realized return if you convert the stock and immediately sell it (ignoring any commissions)