Tulsa Drilling Company has $1.7 million in 14 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $32, and the bonds mature in 10 years. The bonds are currently selling at a conversion premium of $80 over the conversion value. Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. Today, one year later, the price of Tulsa Drilling Company common stock has risen to $42. What would your rate of return be if you had purchased the convertible bond one year ago and sold it today? Assume that on the date of sale, the conversion premium has shrunk from $80 to $30. (Don’t forget to include the interest payment for the first year)   B. Assume the yield on similar nonconvertible bonds has fallen to 12 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Tulsa Drilling Company has $1.7 million in 14 percent convertible bonds outstanding. Each bond has a $1,000 par value. The conversion ratio is 40, the stock price is $32, and the bonds mature in 10 years. The bonds are currently selling at a conversion premium of $80 over the conversion value. Use Appendix B and Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods.


a. Today, one year later, the price of Tulsa Drilling Company common stock has risen to $42. What would your rate of return be if you had purchased the convertible bond one year ago and sold it today? Assume that on the date of sale, the conversion premium has shrunk from $80 to $30. (Don’t forget to include the interest payment for the first year)

 

B. Assume the yield on similar nonconvertible bonds has fallen to 12 percent at the time of sale. What would the pure bond value be at that point? (Use semiannual analysis.)

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education