Use straight bond value or current market price for HPR formila?

Question

Problem: Calculate the expected one-year rate of return for Dosler’s convertible bond.

Should I use the Straight Bond value or the Current Market Price value? Please see below.

HPR = (Capital gain or loss + income)/current Straight Bond Value or Current Market Price?

You currently own a convertible bond in Dosler Company. Information pertaining to Dosler’s convertible bond and common equity is as follows:

Characteristic	Convertible Bond	Common Equity
Par value	$1,000
Coupon	6%
Current market price	$960	$42 per share
Straight bond value	$940
Conversion ratio	25
Conversion option	At any time
Current Dividend		$0
Expected market price in one year	$1,080	$54 per share

Answer 1

To calculate the holding period return (HPR) for Dosler's convertible bond, you should use the current market price of the bond rather than the straight bond value. This is because the HPR formula is based on the actual amount you invested or the current value of the bond in the market.

HPR = (Capital gain or loss + income) / Current Market Price

Where:

1. Capital gain or loss is the difference between the future expected market price of the bond and its current market price.
2. Income is the interest (coupon payment) you receive during the holding period.

From the given data:

Current Market Price: $960

Coupon Income: 6% of $1,000 (par value) = $60

Expected Market Price in one year: $1,080

Capital Gain = Expected Market Price − Current Market Price = 1,080 − 960 = 120

Income (from coupon income) = 60

HPR = (120 + 60) / 960 = 18.75%

Hope this was helpful.