Response to the following problem:
An 8% convertible bond carries a par value of $1000 and a conversion ratio of 20. Assume that an investor has $5000 to invest and that the convertible sells at a price of $1000 (which includes a 25% conversion premium). How much total income (coupon plus capital gains) will this investment offer if, over the course of the next 12 months, the price of the share moves to $75 and the convertible trades at a price that includes a conversion premium of 10%? What is the holding period return on this investment?
Finally, given the information in the problem, determine what the underlying share is currently selling for.