Question

A customer buys a $1,000 par reverse convertible note with a 1 year maturity and a 6% coupon rate. At the time of purchase, the reference stock is trading at $50 and the knock-in price is set at $40. If, at maturity, the reference stock is trading at $25, the customer will receive: __________.

Answer 1

Answer:

As the knock-in was reach, it will receive the original investment plus the coupon yield: 1,060

Explanation:

At maturity

Because the knock-in was achieved, the customer can pick to recieve stock or cash

when the contract was made, the stock price was 50 so 1,000 are equivalent to:

1,000 / 50 = 20 shares

we multiply this by the market price.

20 x 25 = 500

between 500 in stocks and 1,000 in cash it will prefer 1,000

Then, the interest will be:

1,000 x 6% = 60