Question

8.

In 1996, Marriott International made an issue of unusual bonds called liquid yield option notes, or LYONS. The bond matured in 2011, had a zero coupon, and was issued at $539.15. It could have been converted into 8.83 shares. Beginning in 1999 the bonds could have been called by Marriott. The call price was $610.71 in 1999 and increased by 5.0% a year thereafter. Holders had an option to put the bond back to Marriott in 1999 at $610.71 and in 2006 at $859.07. At the time of issue the price of the common stock was about $50.85. Assume annual compounding and a face value of $1,000.

a. What was the yield to maturity on the bond? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Yield to maturity _________ %

b. Assuming that comparable nonconvertible bonds yielded 10.7%, how much were investors paying for the conversion option? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Conversion option value ___________ $

c. What was the conversion value of the bonds at the time of issue? (Round your answer to 2 decimal places.)

Conversion value    _____________ $

d. What was the initial conversion price of the bonds? (Round your answer to 2 decimal places.)

Conversion price _____________ $

e. What was the conversion price in 2005? (Round your answer to 2 decimal places.)

Conversion price _______________ $

f. If the price of the bond in 2006 was less than $859.07, would you have put the bond back to Marriott?

-	Yes
-	No

g-1. At what price could Marriott have called the bonds in 2006? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Call price ___________ $

g-2. If the price of the bond in 2006 was more than the call price in part (g-1), should Marriott have called the bonds?

-	Yes
-	No

Answer 1