You purchased one of AAA
Corp.’s 9%, 15-year convertible bonds at its $1,000 par value a year ago
when the company’s common stock was selling for $25. Similar bonds
without a conversion feature returned 10% at the time. The bond is
convertible into stock at a price of $35. The stock is now selling for
Assume no dividends. a) You exercise the conversion
feature today and immediately sold the stock you received. Calculate the
total return on your investment.
b) What would your return have been if you had invested $1,000 in AAA’s stock instead of the bond?